Handbook_of_Country_Risk_2008_2009.pdf

THE HANDBOOK OFCOUNTRY RISK

2008A Guide to International Business and Trade

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First published in 1999. Tenth edition published in 2008 by GMB Publishing Limited.

© Coface and GMB Publishing Limited, 2008ISBN: 978-1-84673-111-2

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Contents

■ ACKNOWLEDGEMENTS ......... vi

■ FOREWORD............................. vii

2008: The year of lurkingdangersFrancois David, Chairman, Coface

■ INTRODUCTION...................... ix

Jonathan Reuvid, Senior Editor, GMBPublishing

■ COFACE LAUNCHES ANEW BUSINESS CLIMATERATING....................................xvii

■ THE COFACE WORLDWIDE@RATING SYSTEM .............. xxiii

■ SECTOR RISK OVERVIEW ... xxvi

Christine Altuzarra and DominiqueFruchterEconomic Studies and Country RiskDepartment, Coface

■ EUROPE AND THE CISOutlook for 2008:Europe and the CIS ..................2

Jean-Louis Daudier, DominiqueFruchter, Christine Altuzarra andOlivier OechslinCountry Risk and Economic StudiesDepartment, Coface

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

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

■ THE AMERICASOutlook for 2008:The Americas ..........................156

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

■ ASIAOutlook for 2008:Asia...........................................238

Christine Altuzarra, Constance Boubliland Olivier OechslinEconomic Studies and Country RiskDepartment, CofaceAfghanistan .................................245Australia......................................246Bangladesh..................................249Cambodia....................................253China..........................................255Hong Kong..................................259India...........................................263Indonesia ....................................267Japan ..........................................271Laos ...........................................275Malaysia......................................277Mongolia.....................................281Myanmar.....................................283Nepal..........................................285New Zealand ...............................286Pakistan ......................................289Papua New Guinea.......................293Philippines...................................295Singapore ....................................299South Korea.................................303Sri Lanka.....................................307Taiwan ........................................310Thailand ......................................314Vietnam ......................................318

■ THE MIDDLE EAST ANDNORTH AFRICAOutlook for 2008:North Africa and Near &Middle East .............................324

Catherine MonteilEconomic Studies and Country RiskDepartment, CofaceAlgeria ........................................331Bahrain .......................................335Egypt ..........................................339Iran ............................................343

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

■ SUB-SAHARAN AFRICAOutlook for 2008:Sub-Saharan Africa.................402

Marie-France RaynaudEconomic Research and Country RiskDepartment, CofaceAngola ........................................410Benin ..........................................414Botswana ....................................416Burkina Faso................................420Burundi.......................................422Cameroon ...................................424Cape Verde..................................427Central African Republic ................428Chad...........................................430Congo.........................................432

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

■ ACRONYM TABLE ANDLEXICON .................................515

Acknowledgements

The publisher wishes to thank Yves Zlotowski (Coface’s ChiefEconomist), Coface’s country and short-term risk experts (ChristineAltuzarra, Nathalie Ballage, Sophie Botha, Constance Boublil, Jean-Louis Daudier, Benjamin Denis, Dominique Fruchter, Mikael Kalfa,Catherine Monteil, Olivier Oechslin, Pierre Paganelli, Marie-France

Raynaud, Jean-Francois Rondest) and Coface’s entities across theworld who have contributed to this handbook.

Our thanks are also extended to Sarah Barthelemy (La toucheanglaise), Govind Bhinder (FEAT – Financial and Economic Authors

and Translators), Stanley Glick (Lingua Franca) and Coface’scommunications department.

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

FOREWORD

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FOREWORD

2008: The year of lurking dangersFrancois David, Chairman, Coface

The world economy avoided the worst in2007, experiencing only a controlled slow-down in the United States and disappointing,though not calamitous, growth in Europe.The emerging countries confirmed their po-sition as motors of global economic growth.Yet the year ended in a climate of uncer-tainty. The possibility of a recession in theUnited States is on everybody’s mind, theprice of oil has hit the US$100-mark and thefinancial malaise, caused by a structuralmalfunction of the financial system, givesreason to believe that the markets are stillhaunted by the spectre of a huge creditcrunch. Will 2008 turn out to be the year ofthe credit crisis? We obverse that such crisesoccur 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 percent. The crisis then originated in the UnitedStates, just like the storm brewing in 2008.

Our central scenario does not envision thedisaster announced by some. We stand by ourforecast of 1.7 per cent growth in the UnitedStates (against 2.1 per cent in 2007). Worldgrowth will undoubtedly lose 0.8 percentagepoints between 2006 and 2008, but it shouldstill reach 3.6 per cent in 2008. Experienceshows that all the default peaks recorded byCoface correspond to a decline of at least 0.8points in global GDP, as is the forecast for2008. However, growth needs to fall below 2per cent to bring about a real credit crisis,which is not our current scenario.

The year 2008 should therefore be markedby a slowdown – not a recession – due to aslump in US household demand. Against abackground of excess supply, the correctionin US house prices will continue. The nega-tive wealth effect associated with real estate

assets (as well as financial assets) willhamper the refinancing of individual loans.Overall, these borrowers are expected toincrease savings and cut consumption.

The current deflating of the US propertybubble is fundamentally different from thecrisis in 2001. The default peaks observedthen had a lot to do with the type of bubble,which was caused by corporate over-invest-ment. Companies corrected this excess bydrastically reducing their spending, thustriggering a surge in defaults. In 2007 and2008, it is not so much companies as house-holds that are over-indebted. Companies arenot at the heart of the crisis. They could behit by collateral damage though in the formof economic shocks and more difficult accessto financing. But the overall impact of aneconomic slowdown on corporate paymentbehaviour is likely to be less marked thanwas the case seven years ago.

This guarded optimism should not hide thefact that some countries are clearly at risk ofcatching the correction contagion currentlysweeping across the United States. These in-clude the United Kingdom (on our negativewatchlist since June 2007), Spain (on our neg-ative watchlist since September 2007) andmore recently Ireland (on our negativewatchlist since December 2007). What theyall have in common is a dangerous cocktail ofadeflating housing market and householdover-indebtedness. In all three countries, growthhas been much stronger than in the rest of Eu-rope, in part due to the multiplier effect of abubble economy. The expected decelerationcould affect companies used to a robustenvironment.

As for the emerging countries, their growthis expected to remain resilient. In Asia, espe-cially China, buoyant domestic demand will

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help offset the decline in US sales. A con-trolled slowdown would even be welcome inChina, where the investment boom has cre-ated overcapacity that is detrimental to thefi-nancial viability of some companies. Thegrowth of the emerging economies has beenextraordinary. On the whole, they posthealthy current account surpluses – the ob-verse of the US deficit – which have enabledmost of them to reduce debt and accumulatecomfortable foreign exchange reserves. Someof them today have exchange reserves equiv-alent to 10 months’ imports, compared withsix months’ in 2001. Others, like Russia, In-dia and China, have even become major inter-national investors. As emerging countrieshave become less dependent on capital in-flows from developed countries, they are lessvulnerable to a potential credit crunch.None-theless, caution is called for.

Firstly, overabundant liquidity is a risk fac-tor. The flood of capital and the creation of ex-cess currency create a series of bubbles. Stockmarkets have risen beyond reasonable levels,particularly in China, coupled with explodingdomestic credit and rising real estate prices.Arecession would have serious consequencesfor this surplus environment. In any case,2008 is expected to see highly volatile assetprices in a number of emerging countries.

More importantly, the brazen financialperformance and robust economic growth ofthese countries has, in some cases, led toessential business reforms being overlooked.

Improvements in governance standardshavenot kept pace with the massive inflows ofvolatile capital in search of high returns. Acountry’s overall liquidity and solvency canno longer be the sole measure of risk. Thebusiness climate is a key factor for exportersawaiting payment, as for investors placingtheir capital. Economic players should knowwhether corporate accounts give a true pic-ture of a company’s financial position andwhether, in the event of a problem, the locallegal system is able to settle disputes.

Coface – which underwrites risk, gathersinformation and collects debt – possessesinvaluable experience in these matters. Itsdirect presence in 64 countries gives it aperfect, hands-on understanding of the busi-ness climate. Our staff across the worldgrapple daily with the realities ontheground.Consequently, Coface has included for thefirst time a business climate rating in thisyear’s issue of the handbook. It is notgovernance on paper that interests us, butthe realities of the business world. This newrating is available to everyone. It will, I’msure, help guide the decisions of businesspeople who embark on the somewhat bumpyadventure of globalisation.

The year 2008 will unquestionably be adifficult one. The world economy has, in myview, the resources to ensure that the ‘airpocket’ does not turn into a catastrophe.Coface will do its part, providing all economicplayers with the tools to better manage thisyear of lurking dangers.

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INTRODUCTION

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Introduction*

Jonathan Reuvid, Senior Editor, GMB Publishing

*Coface does not take responsibility for the views expressed in this article.

Until the last 10 days of December, it seemedthat the political outlook for 2008 and beyondhad improved during 2007 in terms of re-duced threats to global security while hopesremained that the economic outlook mightnot deteriorate further following the ‘creditcrunch’ sparked off by the sub-prime mort-gage crisis in the United States.

All that changed with the post-Christmasassassination of Benazir Bhutto, Pakistan’sformer prime minister and leader of thePakistan People’s Party (PPP) in the thenforthcoming parliamentary election origi-nally scheduled for early January and thendeferred six weeks. The implications forglobal security are discussed below. By com-parison the debacle of Kenya’s rigged presi-dential election, although a setback for thecause of democracy in Africa and possibly ahumanitarian disaster, poses a longer termthreat to the economic evolution and politicalsecurity of sub-Saharan Africa.

There has been no relief from two of theeconomic threats highlighted in this intro-duction a year ago: the exploitation andcontrol of the world’s oil and gas resourcesand the stalemate in the Doha Round ofWTO negotiations. The dominance of Chi-nese investment in oil and Russian invest-ment in gas resources in Africa continues tocause concern, and there are now questionmarks over the WTO’s future following themost recent failure to make progress. Thebreaching of the world’s crude oil pricebarrier of US$100 a barrel in the first weekof January has more than symbolic signifi-cance. It increases inflationary pressures

everywhere and makes recession more likelyin the United States and Europe, both as adirect result of cost increases and also in theimpact on business confidence.

On the other hand, perceptions are chang-ing of the impact of China and India, themajor emerging Asian economies, on thedeveloped world. There is little reason todoubt that exceptional GDP growth willcontinue in South-East Asia through to 2009in spite of some worrying trends, such asprice inflation in China, and Asian growthwill help to offset the knock-on effects of amajor US economic downturn. Until now,perceived economic wisdom has been that‘when the US sneezes, the rest of the worldcatches a cold’. This time, it may be that oursymptoms will be relieved by an Asian ‘fluinjection’. If so, another marked shift in thetectonic plates of the world’s political econ-omy will be confirmed.

Again, a more hopeful note was struck inBali at the International EnvironmentalConference in October 2007 which was con-vened to develop a successor treaty to theKyoto agreement for signature this time byall the world’s major energy consumer coun-tries, including the United States, withspecific targets for emission reductions by2020. After an unpromising start, the meet-ing made significant progress when a motionproposed by India that new emission reduc-tion targets shouldbe negotiatedandadoptedby the end of 2012. The resolution was passedunanimously but time is running out for the2020 achievement deadline.

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Overall, there is little difference in theeconomic analysis that follows from those ofthe other distinguished authors of this edi-tion’s reports although a rather more pessi-mistic view is taken of the economic outlookfor 2008. For the 2008–2009 edition of Risk,the introduction this year focuses as muchon political as on economic issues; it beginswith commentary on key economic factorshaving global significance as well shorterterm regional impacts.

THE RISK OF RECESSIONThe United StatesThe last US recession began in March2001 and ended in November that yearafter three quarters of negative eco-nomic growth.

The current six-year economic cycle whichfollowed was stimulated by a housing bubblethat burst at the end of 2006. House pricesfell by about 6 per cent during 2007 (accord-ing to the Schiller 20 city composite index).More dramatically, housing starts, always abarometer of US economic health, fell froman annualised monthly rate of 2.3 millionunits in January to 1.2 million units inNovember 2007. Surprisingly perhaps, thecredit crisis caused by falling house pricesand demand for new housing did not hitfinancial markets until the summer whennon-performing sub-prime loans impactedthe secondary market for mortgages causingbanks to take tens of billions of dollars inhousing-related assets on to their balancesheets. Mr. Alan Greenspan, former Chair-man of the US Federal Reserve (the Fed),estimates that losses on sub-prime andrelated securities will probably reach at leastUS$200 billion and up to US$400 billion.

This financial crisis and its impact on the‘real’ economy is very different from the ‘dot-com’ collapse of 2001 which preceded the lastUS recession. On that occasion, the USeconomy was saved from a steep downturnby the availability of cheap consumer creditand a booming housing market. In 2008, thehousing market is in reverse and it is difficultto see how the Fed, having surprisinglydropped 1–3.5 per cent in January, will beable to cut its fund rate again in the face of

projected rates of inflation. Strictly speaking,the present situation is a banking crisisrather than a ‘credit crunch’, of which a lackof market liquidity is the main feature. Thefinancial players no longer have confidencein the solvency of their counterparts on aninternational scale and were unwilling toservice each other’s overnight requirementswhen demand peaked. This situation wassaved only by the coordinated action of theEuropean Central Bank (ECB), the Fed andthe Bank of England, in which the ECB tookthe lead, of injecting large amounts of liquid-ity into the markets.

More encouraging features of the last threemonths were a revival in capital inflowsreturning to the United States from October2007 and, setting aside political considera-tions, the investment of sovereign wealthfunds (SWFs), notably those of China, Sin-gapore and Abu Dhabi, and Chinese banksinto blue-chip Wall Street and British banks.These injections give a strong signal thatcentral banks in Asia and the Middle Easthave no present intention to shift theirreserve assets out of dollars.

US inflation is still projected to run at 2.5per cent in 2008 but, given oil and food pricerises, inflationary pressures will persist. Onthe other hand, unemployment statistics arerising. The report for December showed ajump in the unemployment rate to 5 per centfrom 4.7 per cent, the highest level sinceNovember 2005. Stronger export growth asa by-product of the weak dollar and healthydemand from foreign markets are unlikely tooffset the negative domestic factors andrising oil prices. For November 2007, the UStrade deficit rose to a record US$57.8 millionalthough the trade gap with China narrowed.

In the final analysis, the critical factor indetermining the scale of the US economicdownturn will probably be consumer confi-dence. Much of the Wall Street financialcommunity is already forecasting recessionand exposure risks in other markets such asleveraged loans or more complex financialinstruments may have been underestimated.However, consumer expectations are likelyto be more decisive.

Already confidence levels are at low ebb inspite of direct actions by the Fed in the home

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loans sector. Some players claim that theeconomy has already slipped into recession.While the banks remain bearish, their likelyreaction is to reduce lending and raise creditstandards in anticipation of further loanlosses. If unemployment also rises, then re-cession may become a self-fulfillingprophecy.

THE EURO AREASo far, business confidence has held up quitewell, fortified by a strong exportperformance.However, the appreciating currency may betaking its toll as the index of manufacturingexports has fallen and is below its long-termaverage. Nevertheless, the eurozone econ-omy is not severely vulnerable to decliningUS imports; if they fell twice as fast as GDP,a 1 per cent reduction in US growth wouldreduce euro area growth by no more than 0.5per cent.

The ECB has narrowed the spreadbetweenthe interbank rate and its refinancing rateand has switched efforts from increasing thevolume of commercial loan books to improv-ing their quality. High borrowing costs willslow investment rather than consumption inthe short-term because consumer spendinghas not been fuelled by past borrowing to thesame extent as in the United States and theUnited Kingdom.

Employment and wages continue to growfaster than at any time since 2001 while fueland food prices have contributed to inflationremaining stubbornly above target. Given itsmindset, the ECB is likely to focus in 2008on constricting inflation rather than stimu-lating growth.

Among the major eurozone economies,where some of the hard-fought for labourmarket reforms were reversed in 2007, thereare dangers for Germany in the new roundof wage negotiations and GDP growth isforecast to fall back again below 2 per cent.In France, President Sarkozy has yet todeliver on his promise to scrap the statutory35-hour working week and the unemploy-ment rate remains at an unacceptably high9 per cent level. However, both core econo-mies have maintained tight control of publicsector borrowing where the ratios to GDPhave fallen steadily since 2004.

Spain is expected to maintain its GDPgrowth in 2008/2009 above the eurozone av-erage, albeit below 3 percent, and a positivepublic sector balance. However, unemploy-ment will remain above 8 per cent while thecurrent account deficit as a ratio of GDP mayrise above the 10 per cent level. The Spanishhousing market is beset by rising inflationand a marked downturn in house prices thatthreatens a negative equity crisis for mort-gage holders. Italy, by contrast, is expected tounderperform its partners again in GDPgrowth although other economic indicatorsare relatively stable. Overall, the outlook forthe euro area economies is only mildly nega-tive, barring any potential impact of the ma-jor political threats highlighted below.

OTHER MAJOR EU ECONOMIESThe UK economy appears more vulnerableto global downturn than its EU partners.Although GDP growth rates were approach-ing Spanish levels in 2006 and 2007 and thecurrent forecast for 2008 remains above 2per cent, investment is expected to tumblefrom around the 7 per cent growth levels of2006 and 2007 to as little as 2 per cent in2008. However, even this lower level ofgrowth may prove over-optimistic if the‘credit crunch’ initiated by the collapse of oneBritish bank, a significant mortgage lender,and accompanied by the end of the propertyboom results in a major consumer spendingcutback as personal credit is curtailed. TheBank of England is expected to reduceinterest rates down to 4 per cent by 2008year-end, but this progression could be ar-rested by energy cost and food price inflation.

The knock-on effects on the commercialand industrial sectors are already apparentwith a flood of corporate profit warnings. Alower tax yield from 2007/2008 companyprofits will exert further pressure on publicsector spending and could cause the publicsector deficit ratio to climb back to its 2003–2005 level in excess of 3 per cent. Much willdepend on whether the government will beable to contain public sector wage and salaryincreases to genuinely no more than the rateof inflation. Meantime, partly as a result ofsterling’s 10 per cent fall against the euro inthe second half of 2007, UK GDP ceded fifth

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place in world ranking to France in the thirdquarter of 2007.

The smaller economies of the EuropeanUnion, the Baltic States, Slovenia and Ire-land have continued to prosper in 2007, andtheir outlook for 2008 is dimmed only thesame energy and food cost considerations astheir partners and the extent to which theirexports to other EU members are affected.Poland, the largest of the 2004 intake of newmembers, enjoyed continuing strong growthin 2007 and reduced unemployment. Bothtrends are forecast to continue in 2008although GDP growth is expected to fall backunder 6 per cent. Although exports areforecast to increase, imports are expected torise faster so that the trade deficit ratio mayrise to 3.3 per cent of GDP or more.

AsiaAttention is focused on China and India asthe two most significant emerging marketswhile Japan, which remains the secondlargest global economy, has regained stabil-ity at euro area levels of GDP growth.Inflation is forecast to remain below half aper cent throughout 2008 and unemploymentto ease below 4 percent. Japan’s currentaccount is expected to remain positivearound4 per cent of GDP with the public sectordeficit ratio at a similar level. However,public sector debt is forecast to rise to 180per cent of GDP in 2008, an overhang fromJapan’s banking crisis of the 1990s.

India’s economy is expected to power aheadthroughout 2008/2009 maintaining GDPgrowth above 8 per cent, with a favourableimpact on world trade and without some ofeconomic tensions that are now emerging inChina. However, it is susceptible to the sameprice inflation in imported energy costs.

China’s trade surplus was impacted byrising oil prices in the final quarter of 2007when its surplus of exports over imports fellfrom US$26.28 billion in November toUS$22.69 billion in December 2007. How-ever, for 2007 as a whole, China’s overalltrade surplus rose by nearly 50 per cent toaround US$300 billion. Within the total ofChina’s foreign trade, US trade was lessaffected than the European Union. WhileChina’s surplus with the United States rose

by 19 per cent to US$163 billion, the surpluswith the European Union increased by 46per cent to US$143.3 billion. In the process,the expanded European Union replaced theUnited States as China’s largest exportmarket, and Chinese exports to the eurozoneovertook those of the United Kingdom in thethird quarter of 2007.

The increasing Chinese trade surplusesshould be viewed in relation to appreciationof the renminbi by about 12 per cent since itspeg against the US dollar was officiallybroken in mid-2005. US and EU traderegulators will continue to argue that anaccelerated revaluation policy by Beijing iscalled for. The current account balance rep-resents more than 10 per cent of China’sGDP, an exceptional level for a large economyand more than twice that of Germany. Risingcommodity prices and labour costs arisingfrom the new labour contract law that makesit harder to dismiss workers are alreadycausing Chinese export prices to increase butthat is not expected to dampen exportssignificantly in 2008.

With GDP growth continuing at above 10per cent in 2008 the mounting challenge forChina is to channel investment into thecreation of wealth in the underdevelopedregions and to stimulate domestic consump-tion. There are signs now that not onlyfarmers but also the emergent middle classin China’s major cities are becoming moreclamorous.

Overall, the chances are that the buoyantAsian economies, better prepared to face aglobal slowdown than in 2001, will survivethe present downturn relatively unscathed.The extent to which their superior perform-ance will sustain underperformance of theWestern economies remains an open ques-tion. At the least, Asia will provide a strongmarket for US and UK exports made morecompetitive by their weakened currencies.

A recent analysis by HSBC has estimatedthe contributions to global GDP growth bythe major economies. Based on marketweight the contribution of the United Statesfell from more than 20 per cent in 2006 toslightly less than 15 per cent in 2007 whilethe euro area contribution was reducedmarginally to just 15 per cent. Conversely,

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China’s contribution rose from less than 25per cent in 2006 to about 17.5 per cent in2007. India’s contribution in 2007 matchedthat of Japan at the level of 5 per cent.Translated into purchasing power parityterms, China contributed 33 per cent to worldgrowth in 2007 and India just over 10 percent. The US and euro area contributionswere about 7.5 per cent each.

In past recessions, the weight of the G7economies was such that when the bigeconomies turned down, commodity priceswould drop as demand slackened therebyreducing inflation. The downside of thestrong Asian economies increasing demandfor commodities is that there will be nocompensating relief from cost inflation andthis will limit the scope for G7 centralbankers to cut interest rates.

Other emerging economiesRussia and Brazil are two further emergingeconomies that have an important impact onthe world economy. Neither of them contrib-utes as much as 5 per cent to world GDPgrowth although both are growing stronglyas individual economies. Their importancederives from their global significance assuppliers of oil and gas in the case of Russiaand of metals and minerals in the case ofBrazil. The insatiable appetite for these corecommodities in both Western and Asianeconomies has provided the engines for theirgrowth and neither is likely to be affected in2008–2009 by US and European downturnsfor the reasons given above.

POLITICAL PERILSOnly one of the major threats which was stillof concern at the beginning of 2007 hasreceded. Thanks to the combined diplomaticefforts of China and the United States, withassistance from other governments in theregion, a settlement was achieved with NorthKorea to halt its nuclear programme andinstall a satisfactory inspection regime inconsideration for increased economic aid.Elsewhere the outlook for peace and securityremains bleak.

The Middle EastIn the Middle East, there have been someencouraging local developments but theomens for a regional solution to sectarianconflicts and the issue of Palestinian nation-hood are unpromising.

IraqThe year 2008 began with more reason forhope from efforts to re-construct Iraq as ademocratic state. The ‘surge’ of US troopsintroduced under the command of GeneralDavid Petraeus was more successful thanthe cynics expected. Even after the dismissalof former Defence Secretary Donald Rums-feld who had denied the need for moresoldiers on the ground, the most likelyscenario seemed to be a descent into civil warbetween Sunni and Shia extremists. How-ever, civilian deaths are sharply down inBaghdad, the local economy is reviving andthere is evidence of a return to peacefulcooperation between the Shia and Sunnipopulations. These rapprochements are morethe result of local leaders agreeing to restoregood relations than the actions of the multi-sect elected government that has made pain-fully slow progress in uniting the country.

For the time being, at least, the prospectof partition has dimmed. In Basra, where theinitial welcome for British peace enforcementtroops turned to disillusion and subsequentlyminority hostility, partial withdrawal to-wards the end of the year became politicallyinevitable. The Iraqi army and Baghdadpolice that have taken over have yet to provethat they can manage the remaininginsurgency.

AfghanistanThe American and British commitment tolong-term military engagement in Afghani-stan is unchanged. Any dilution of the Britisheffort due to the Iraq commitment has beenrepaired and autumn offensives against theTaliban yielded positive results. The criticaltask is to convince the civilian population tosupport the democratically elected govern-ment of President Hamid Karzai rather thanthe Taliban; the original ‘hearts and minds’strategy was never accomplished because the

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continual military engagement of alliedtroops prevented them from focusing onreconstruction projects. Negotiation with lo-cal militia leaders to wean them from supportof the Taliban is necessary but difficult,particularly since it may not carry PresidentKarzai’s support.

The whole security process is underminedby the porous nature of the border betweenAfghanistan and Pakistan that enables theTaliban and its Al Quaeda supporters to slipaway, recruit and regroup among Muslimextremists in Pakistan and return to take upthe struggle.

PakistanThe erosion of General Pervez Musharraf’sauthority was probably inevitable. His ina-bility to hold the balance between tacklingextremists as an ally of the West and holdingthe confidence of more moderate Pakistanipeople looking for a return to democraticallyelected government came to a head with theassassination of Mrs. Benazir Bhutto, one ofthe two former exiled prime ministers whowere granted amnesty to return to Pakistanto prepare for the forthcoming election.

The election outcome is highly uncertain.The presidency is not under immediatethreat but the result could be some form ofcoalition government between the main par-ties or even a government controlled byextremists. In the resultant para-democracy,it is not impossible that the army will againseize control under its new leader. Whateverform of government emerges, the West needsits firm support in closing the border withAfghanistan effectively and in the pursuit ofextremists.

Israel and Palestinian TerritoriesThe understanding reached in Novemberbetween Prime Minister Ehud Olmert ofIsrael and President Mahmoud Abbas, underthe auspices of President Bush to reach acomprehensive agreement within 12 monthsfor the creation of a Palestinian state withinternationally endorsed boundaries shedsome weak rays of hope. However, twomonths later there seems to be littleprogress.Israel continues to construct settlements on

the occupied territories of the West Bank,and Hamas has persisted in launching rock-ets at Israel from its Gaza stronghold,incurring retaliatory Israeli action. Bothpractices have to stop soon if there is to beany hope of a positive result. However,President Abbas does not control the Gazastrip and it is doubtful how successfully Mr.Olmert can persuade his electorate to aban-don the building of new homes.

Nor is this a game for two or even three play-ers. A lasting solution also requires recogni-tion of the State of Israel and no enduringsettlement on Palestine is possible withouttheparticipation of Iran, Syria and Arab Leaguemembers who have already offered engage-ment. In his first serious foray to the MiddleEast in the seven years of his presidency,George Bush seems to have lost the plot.Grandstanding speeches to his hosts in SaudiArabia and the Gulf states to gang-up on Iranas the primary source of terrorism are likely tobe counterproductive. Although friendly Arabstates with US bases on their soil wish to co-operate and are nervous of the intervention offundamentalist Iran in their affairs, it is in-conceivable that they will combine publiclywith the present US administration, thearchi-tect and prime mover in the invasion of Iraq tothreaten Iran. Nor are President Bush’s con-tinuing forecasts of an ultimate American ‘vic-tory’ in Iraq consistent with a diplomaticinitiative. Ex-Prime Minister Tony Blair issimilarly damaged as a peace broker by hisrole as President Bush’s head honcho in theprevious ‘coalition of the willing’.

IranThe publication in the autumn of 2007 of a USNational Intelligence Estimate stating thatIran had halted its nuclear weapons pro-gramme in 2003 could have marked a water-shed in US foreign policy. At least, it reducedthe short-term risk of a pre-emptive strike onIran’s nuclear installations during the final‘lame duck’ year of the Bush administrationeither by the United States itself or by Israelwith tacit US approval. However, PresidentBush has maintained his adversarial stanceby urging the Arab states to isolate Iran. Thiswill only strengthen President Mahmoud Ah-madinejad’s political position at home while

INTRODUCTION

xv

the Arab world waits for a change in US for-eign policy under a new presidency in 2009.Meantime, patient dialogue with Tehran byEuropean Foreign Ministers andMr.Muham-mad Al Baradei’s Atomic Energy Agencyteamkeeps open the door to accommodation withIran.

In the overall analysis, no lasting peace inthe Middle East or banishment of extremistterrorism will be possible unless underwrit-ten by mainstream Shia and Sunni Islam inconcert including the Wahibi sect.

AfricaThe year 2007 was another poor year fordemocracy all round in Africa. The UnitedNations and the African Union (AU) failed tocome to grips with the Sudan Government ofPresident Omar al-Bashir and halt its per-secution of Darfur. The result has been ahumanitarian disaster.

Kenya, much praised for its conduct ofprevious elections, relapsed into chaos withrigged voting in its December 2007 election,which returned President Mwai Kibaki tooffice and re-opened past tribal divisions.

In Zimbabwe, the British Commonwealthand the EU continued to turn blind eyes tothe corrupt government of Robert Mugabethat has wrecked the economy and is ex-pected to stage another rigged election in2008 to maintain Mugabe in power. Thediplomacy of President Thabo Mbeke ofSouth Africa to steerMugabe intoretirement,which was the figleaf for international inac-tion, has failed to deliver.

Widely regarded as a safe pair of hands,Mr. Mbeke faces the end of his political careerhaving been ousted by his longstandingrival,Jacob Zuma, from his Presidency of SouthAfrica’s ruling ANC party in another unwel-come development at the close of 2007. Thisputs Mr. Zuma in the position of favourite tosucceed Mr. Mbeke as President of SouthAfrica after the next general election in 2009and casts a shadow over the country’s pros-pects for stable, moderate government. Cur-rent action by the public prosecutor maysecure a conviction for fraud against Mr.Zuma, but there is a bumpy road ahead.

CHANGE OR CONTINUITY OFLEADERSHIP2007There were important changes in leadershipof three EU member states in 2007: France,the United Kingdom and Poland and confir-mation of continuity in China. In Germany,the coalition government of Chancellor An-gela Merkel was weakened by the resignationof Mr. Franz Muntefering, Labour Ministerand Vice Chancellor, who was the lynchpinof his Social Democratic Party (SDP) withMrs. Merkel’s Christian Democratic Union(CDU).

ChinaIn China, the confirmation of President HuJintao and Premier Wen Jiabao in office fora further five years at the Communist PartyCongress in October 2007 proceededsmoothly with new appointments to the StateCouncil of candidates for the next generationof top leaders. No dramatic changes indomestic or foreign policy are foreshadowedas China prepares to bask in the sunshine ofits 2008 Beijing Olympic Games.

FranceMr. Nicolas Sarkozy trounced his socialistopposition in the FrenchPresidentialelectionwith the promise of tough action to restoredynamic to the French economy. To date, hehas been unable to deliver the promisedstructural changes but these are early days.However, he has grabbed media attentionwith changes in his personal life that havemade him an ‘A’ list celebrity. Whether thatwill be of long-term benefit to him politicallyalso remains to be seen. The Sarkozy style ofan ‘open’ Presidency is certainly a break withthe past; the peccadilloes of past incumbentshave never before disturbed the dignity ofthe Elysees Palace.

President Sarkozy’s effectiveness as aninternational statesman will be tested in thesecond half of 2008 when France assumesthe Presidency of the European Union, andhe will probably attempt to seize leadershipof EU foreign policy. His repositioning ofFrance as a constant, although sometimescritical, ally of America and a dependable

INTRODUCTION

xvi

friend to Saudi Arabia and the Arab worldare indications of a softer French foreignpolicy vision.

United KingdomGordon Brown succeeded Tony Blair, unop-posed, as Prime Minister at the end of June,after 10 years in waiting as Chancellor of theExchequer. At first, he exhibiteddecisivenessand competence leading from the front in hishandling of a series of minor domestic crisesbut was soon blown off coursebytheNorthernRock bank failure, which was managedindecisively due to ill-defined responsibilitiesbetween the Treasury, the Bank of Englandand Britain’s Financial Services Authority.

With a 10-point lead in the political pollsat the time of the Labour Party Conferencein October, Mr. Brown encouraged the notionthat he might call an early general electionbut backed away from a contest which wasjudged to be more than winnable and wouldhave given him the authority of an electedPrime Minister. A series of blunders inprotecting the identities of individuals bene-fiting from social services and damagingrevelations regarding his party’s fundingfollowed. With the developing credit crunchand decline in house prices, his popularityfell dramatically within a few weeks. Moredamaging still has been the undermining ofhis reputation for economic competence dur-ing his long period as Chancellor.Meanwhile,his predecessor continues to tap dance joy-fully on other stages.

Recovery of reputation and popular sup-port during the 18 months or more before ageneral election become mandatory is per-fectly possible, but the likely loss of tax-payer’s money from the Northern Rockepisode and his decision to deny the Britishpeople a referendum on the new EU treaty,which includes most of the provisions of therejected European Constitution, are sure todamage Mr. Brown further.

PolandThe heavy defeat of Mr. JaroslawKaczynski’sLaw and Justice Party at the October generalelections in Poland at the hands of the CivicPlatform puts a new Prime Minister, Donald

Tusk, in the driving seat, with the promiseof more competent government and a returnto diplomacy in its dealings with EU part-ners, notably Germany. The change fromcapricious, clumsy and inefficient govern-ment under the Kaczynski twins is welcomeboth domestically and throughout Europe.

2008Two highlights of the current year will be thePresidential elections in Russia in April andin the United States next November. Thetwo contests could hardly be more differentin character but the outcomes of both areimportant for the rest of the world.

In Russia, President Vladimir Putin hasrearranged the political landscape with greatdexterity and without disturbing the consti-tution. Capitalising on his popularity as thestrong leader who has revived the Russianeconomy, he has taken on leadership of hisparty in the Dumas while still President andhas identified his preferred successor who, inturn, has committed himself to appoint Mr.Putin as Prime Minister after the presiden-tial election in April 2008. Assuming that allgoes according to plan, it will be interestingto see how much presidential powers aredelegated to the new prime minister, giventhat Mr. Putin may want to reverse theconjuring trick in for four years time whenhe becomes eligible to stand again for thepresidency.

United StatesIt is too early in the campaign for the USpresidency to place bets on the likely winner.However, after the early primaries there is areal prospect of America electing either itsfirst woman or its first black President. Whatseems clear is that there is a mood for changesweeping the country after eight years of theBush administration’s brand of Republicanconservatism.

Hopefully, the rest of the world can lookforward to a return to more constructiveAmerican foreign policy and proactive lead-ership from 2009 in international affairs. Areturn to the halcyon days of Americanshuttle diplomacy by Madeleine Albrightand, for those with longer memories, ofHenryKissinger, might achieve real progress.

COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

xvii

Coface launches a new businessclimate rating

The need for the new businessclimate ratingIn assessing country risk, most ratings con-sider a country’s overall liquidity and sol-vency. Coface has always been distinguishedfor basing risk assessments on its ownmicroeconomic experience. Besides the ma-crofinancial and macropolitical outlooks,payment experience on companies is thusincluded among the factors considered indetermining Coface @ratings for countriesand sectors. To improve the accuracy ofcorporate credit risk assessments, however,Coface has sought to give greater considera-tion to the business environment. In assess-ing credit risks, it is indeed equally importantto know whether a company’s accounts faith-fully reflect its actual financial situation andwhether the legal system can provide fairand efficient recourse in case of paymentdefault. By making a new business climaterating available to everyone from 2008,Coface wishes to share its experience inmeasuring the true business climate in allcountries worldwide. The new rating is un-derpinned by the Coface worldwide networkand expertise rooted in its experience withrisk underwriting, business information andreceivables management.

Rating definitionThe new rating is intended to assess overallbusiness environment quality in a country.More specifically, it reflects whether cor-porate financial information is availableand reliable, whether the legal systemprovides fair and efficient creditor protec-

tion and whether a country’s institutionalframework is good for companies.

Like country @ratings, the new ratingsfall on a scale with seven levels in increas-ing order of risk where A1 represents leastrisk:

A1, A2, A3, A4, B, C, D.

How Coface developed the new ratingThe business climate rating comprises twomodules.

The core of the new rating rests on the Cofaceexperience with the quality of informationavailable on companies and the legal protec-tion given to creditors. The module wasdeveloped based on the responses by Cofaceentities worldwide to a questionnairecovering:• the quality and availability of financial

information (legal framework for financialstatement publication, availability, acces-sibility, and reliability of corporate ac-counts and so on);

• creditor protection and debt collectionefficiency (eg, rating grids for summarylegal procedures, ordinary legal proce-dure, court costs, bankruptcy procedures).

The above ratings may be compared toother sources like the ‘institutional profiles’database maintained by the French Ministryof Finance and validated by an internalcommittee to ensure homogeneous and con-sistent responses.


xviii

The above ratings based on the Cofaceexperience are supplemented by a module oninstitutional frameworkquality.Thismodulereflects the quality of institutions whosestrengths and weaknesses can affect compa-nies. The parameters considered include, forexample, public service effectiveness (gov-ernment, education, health, infrastructure),regulatory quality, respect for the law andextent of corruption. The calculations arebased on data from external sources notablyincluding:• the government effectiveness indicator

maintained by the World Bank Institutebased on the quality of public servicesprovided and on civil service efficiency;

• the human development index (HDI), acomposite statistical index created by theUnited Nations to rank countries accord-ing to their qualitative developmentbasedon the average of three quantitative indi-ces reflecting, respectively, health/life ex-pectancy, knowledge or education leveland 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 (WorldBank Institute) that reflects the possibleexistence of policies contraryto thesmoothrunning of a market economy (like pricescontrols or poor bank oversight), and theapparent influence of local regulations onforeign trade and the business climate ;

• a rule of law indicator (World BankInstitute) reflecting the confidence of eco-nomic agents in their judicial system,legal system efficiency and transparency;

• an indicator of corruption (World BankInstitute) reflects the apparent extent ofcorruption, defined as misappropriationof public property for private purposes.

The above indicators and indices are gen-erally based on information derived fromcompany surveys.

The new business climate rating willhenceforth be a component of country @rat-ings beside macroeconomic and political dataand the Coface payment experience.

Country @rating

Business climate Economic, financial and economic prospects

Companies’ payment behaviour

Growth vulnerability

Sovereign financial vulnerability

External overindebtedness

Foreign exchange liquidity-crisis risk

Banking sector’s fragilities

Political vulnerabilities

Coface experience

Institutional environment

Quality and availability of financial information

Creditor protection and debt collection efficiency


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The Coface business climate @ratings for155 countries

A1 Businessclimate

Country@rating

Australia A1 A1Austria A1 A1Belgium A1 A1Canada A1 A1Denmark A1 A1Finland A1 A1France A1 A1Germany A1 A1Ireland A1 A1Japan A1 A1Netherlands A1 A1New Zealand A1 A1Norway A1 A1Singapore A1 A1Spain A1 A1Sweden A1 A1Switzerland A1 A1United Kingdom A1 A1United States A1 A1

A2 Businessclimate

Country@rating

Chile A2 A2Cyprus A2 A2Czech Republic A2 A2Estonia A2 A2Greece A2 A2Hong Kong A2 A1Hungary A2 A3Israel A2 A4Italy A2 A2Luxembourg A2 A1Malta A2 A2Portugal A2 A2Slovakia A2 A3Slovenia A2 A1South Korea A2 A2Taiwan A2 A1

A3 Businessclimate

Country@rating

Bahrain A3 A3Botswana A3 A2Costa Rica A3 A4Croatia A3 A4

Kuwait A3 A2Latvia A3 A3Lithuania A3 A3Malaysia A3 A2Mauritius A3 A3Poland A3 A3Qatar A3 A2South Africa A3 A3Thailand A3 A3United Arab Emirates A3 A2

A4 Businessclimate

Country@rating

Brazil A4 A4Bulgaria A4 A4India A4 A3Jordan A4 BMorocco A4 A4Mexico A4 A3Namibia A4 A3Oman A4 A3Panama A4 A4Romania A4 A4Trinidad and Tobago A4 A3Tunisia A4 A4Turkey A4 BUruguay A4 B

B Businessclimate

Country@rating

Algeria B A4Argentina B CArmenia B CCape Verde B BChina B A3Colombia B A4Dominican Republic B BEgypt B BEl Salvador B BJamaica B CKazakhstan B BLebanon B CPeru B BPhilippines B BRussia B BSaudi Arabia B A4Senegal B BSri Lanka B B


xx

C Businessclimate

Country@rating

Albania C DAzerbaijan C CBenin C BBolivia C DBosnia Herzegovina C DBurkina Faso C BCameroon C BEcuador C CGabon C BGeorgia C CGhana C CGuatemala C BHonduras C CIndonesia C BIran C DIvory Coast C DKenya C CLesotho C BMacedonia C CMadagascar C CMali C BMauritania C CMoldova C DMongolia C CNicaragua C DPakistan C CParaguay C CSerbia C CSyria C CUganda C CUkraine C CVenezuela C CVietnam C BZambia C C

D Businessclimate

Country@rating

Angola D CBangladesh D CBelarus D DBurundi D DCambodia D DCentral African Republic D DChad D DCongo D CCuba D DDemocratic Republic ofCongo

D D

Djibouti D C

Eritrea D DEthiopia D CGuinea D DHaiti D DIraq D DKyrgyzstan D DLaos D DLibya D CMalawi D DMozambique D BMyanmar D DNepal D DNiger D CNigeria D DPapua New Guinea D BRwanda D DSao Tome D CSierra Leone D DSudan D DTanzania D BTogo D CTurkmenistan D DUzbekistan D DYemen D CZimbabwe D D

Business climate @ratings compared withcountry @ratings• In most cases − 93 countries, or 62 per

cent of the countries rated − the businessclimate and country @ratings areidentical.

• For 39 countries, or 26 per cent of thecountries, Coface rated the business cli-mate lower than the country. This oftenconcerns African or Middle Eastern coun-tries, which in most cases enjoy realfinancial solidity and dynamic economieslinked to rising raw material prices. Theirbusiness environment may nonethelessbe subpar (uneven application of the lawthat lends uncertainty to debt collection,lack of transparency of corporate ac-counts).The good performance of theseeconomies underpinned by natural re-source export earnings may sometimeseven have a lulling effect on implementingreforms intended to strengthen institu-tions. Good economic performance thusdoes not always contribute to improving


xxi

the business environment. The case ofIndia, with a business climate rating anotch below the country @rating, andespecially that of China, with a businessclimate rating two notches below thecountry @rating, are characterised by apersistent gap between their boomingeconomies and their deficient legal andinstitutional environments for companies.In certain countries with an overall A1country @rating, like Luxembourg andHong Kong, the business climate onlywarrants an A2 rating due to difficultiesin obtaining financial information oncompanies.

• For 17 countries, 11 per cent of the 150countries involved, Coface rated the busi-ness climate higher than the country. Thisconcerns countries with relatively satis-

factory business environments but whichpresent financial weaknesses often linkedto large current account deficits (Hungary,Turkey, Croatia, Slovakia) or relativelyhigh political risks − in the more classicsense of the term (Lebanon, Israel,Bosnia).

Zimbabwe

Venezuela

Germany

LuxembourgItaly

Lebanon

Hungary Israel

South Africa

China

IndiaBrazil

Saudi Arabia

Russia

Angola

A 1

A 2

A 3

A 4

B

C

D

A 1 A 2

Business climate rating lowerthan country @rating

Business climate

Business climate rating higherthan country @rating

Country @rating

A 3 A 4 B C D

Botswana

Vietnam

Turkey


xxii

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

Country@rating

Business Climaterating

Brazil A4 A4

China A3 B

India A3 A4

Russia B B

10

20

Financial information

Creditor protection

Institutional Environment

Brazil

-

10

20


Cred ito r protection


India

Brazil’s strengths (business climate rating: A4)include the ready availability of businessinformation, a satisfactory legal environment forcollection purposes, and acceptable regulatoryquality for business. Deficient infrastructureremains, however, the country’s main weakness.

In India (business climate rating: A4), financialinformation is available for large companies butnot for the smallest companies. Consolidatedaccounts are also hard to obtain for groups. Thelegal environment is satisfactory although notalways favourable to creditors. Procedures aredrawn out. Infrastructure deficiencies remain themain weaknesses for companies.

10

20


Creditor protection


China

10

20


Creditor protection


Russia

In China (business climate rating: B), financialinformation is difficult too obtain and oftenopaque. The reliability of accounts is poor in somecases. The protection provided by the legalenvironment is particularly limited for foreigncreditors. Infrastructure is relatively satisfactory.

In Russia (business climate rating: B), the civilservice is relatively efficient but the rule of lawand the legal environment offer little security tocreditors. Poor law enforcement undermines thebusiness climate. Transparency as regardsfinancial information and ownership remains veryinadequate.

THE COFACE WORLDWIDE @RATING SYSTEM

xxiii

The Coface worldwide @rating system

Coface introduced the first worldwide insur-able company rating system in 2000. Thepurpose was to assess the capacity of com-panies to meet their business obligationstowards customers and suppliers. This newsystem – @rating credit opinions – becamethe first of four rating systems that interna-tional businesses can now access by loggingon to www.cofacerating.com or any ofthe Coface national websites likewww.cofacerating.fr. A fifth system – busi-ness climate ratings – is now available.

The five @rating systems are as follows:@rating credit opinions represent the

recommended credit exposure for a companyusing a very simple assessment scale (1 @ =€20,000; 2 @ = €50,000; 3 @ = €100,000, etc).Credit exposure for B2B credit transactionsis insurable by Coface. An @rating creditopinion is assigned to some 44 million com-panies worldwide, reflecting Coface’s dualexpertise in corporate information and creditinsurance.

@rating scores, launched in October 2002by Coface and Coface Scrl (which in 2006became Coface Services, Coface’s Frenchbranch specialising in business informationand debt recovery) measures a company’sdefault risk over one year. It compre-hensively and accurately rates 4.5 millionlarge-, medium- and small-sized French com-panies. The ratings are used not only bydifferent sized companies but also by finan-cial institutions looking for a rating systemthat complies with new banking regulations(McDonough ratio). Measuring credit riskamong companies is an important exercisewhen addressing not only traditional needs(corporate loans, B2B credit, market credit)

but also emerging needs created by newinstruments such as loan securitisations andnew capital adequacy rules (McDonoughratio). Companies and banks have an evengreater need for reliable tools in today’sclimate of increasing credit risk and mount-ing scepticism over corporate accountingpractices.

Country @rating – one of Coface’s keyskills – allows the various players in inter-national trade to enhance the security oftheir transactions. It indicates the level ofmedium-term risk presented during thecourse of short-term commercial transactionsby companies in a given country. Moreprecisely, it measures how these financialengagements are influenced by the economic,financial and political outlook of the country,together with the business environment.

The rating is based on three modules: acountry’s economic, political and finan-cial outlook (such as weaknesses in thegeopolitical environment, economic vulnera-bilities, risk of foreign currency liquiditycrisis, external over-indebtedness, govern-ment financial vulnerability and weaknessin the banking sector), business climate andcompany payment experience. These threemodules are combined to achieve a globalrating to be accorded to each of the 165countries tracked. The ratings are monitoredon the basis of seven risk categories: A1, A2,A3, A4, B, C and D in ascending order of risk.

Sector @rating – measures the averagelevel of default risk posed by companies inindividual sectors. A rating assesses thelikely impact on short-term payment behav-iour of the economic prospects and averagecorporate financial position in a particular


xxiv

sector. To establish a rating, Coface usesthree evaluation criteria:• business trends in the sector, which

reflect how market prospects, price levelsand production costs might influence com-pany solvency;

• average financial position of compa-nies in the sector, which reflects theability of companies to cope with economicdownturns;

• payment behaviour in short-termtransactions, as reported by Cofacedatabases.

Business climate @ratingThe new @rating system is intended to assessoverall business environment quality in acountry. More specifically, it reflects whethercorporate financial information is availableand reliable, whether the legal system pro-vides fair and efficient creditor protection,and whether a country’s institutional frame-work is good for companies.

Country @rating definitionsCoface establishes country @ratings on sevenlevels – ranging from A1 for the lowest risksto D for the highest, accordingto the followingdefinitions:

A1 The political and economic situation isvery good. A quality business environ-ment has a positive influence on corpo-rate payment behaviour. Corporatedefault probability is very low onaverage.

A2 The political and economic situation isgood. A basically stable and efficientbusiness environment nonethelessleaves room for improvement. Corporatedefault probability is low on average.

A3 Changes in generally good but some-what volatile political and economicenvironment can affect corporate pay-ment behaviour. A basically securebusi-ness environment can nonetheless giverise to occasional difficulties for compa-nies. Corporate default probability isquite acceptable on average.

A4 A somewhat shaky political and eco-nomic outlook and a relatively volatilebusiness environment can affect corpo-rate payment behaviour. Corporate de-fault probability is still acceptable onaverage.

B Political and economic uncertaintiesand an occasionally difficult businessenvironment can affect corporate pay-ment behaviour. Corporate defaultprobability is appreciable.

C A very uncertain political and economicoutlook and a business environmentwith many troublesome weaknesses canhave a significant impact on corporatepayment behaviour. Corporate defaultprobability is high.

D A high-risk political and economic situ-ation and an often very difficultbusinessenvironment can have a very significantimpact on corporate payment behav-iour. Corporate default probability isvery high.

Sector @rating definitionsCoface establishes sector @ratings on 10levels − ranging from A+ for the lowest risksto D for the highest, accordingto the followingdefinitions:

A+AA-

In a good sector economic environmentwith robust corporate financial health,payment experience has been satisfac-tory. Default probability is low onaverage.

B+BB-

The essentially good economic environ-ment in the sector is not exempt fromshort-term deterioration with negativerepercussions on corporate financialhealth. Payment experience has beengenerally correct and default probabil-ity acceptable.

C+CC-

In a very uncertain economic environ-ment with vulnerable corporatefinancial health, payment behaviour isrelatively poor. Default probability be-comes a nettlesome problem.


xxv

D With a very poor economic environmentprevailing in the sector, weakened cor-porate financial health gives rise togenerally bad payment behaviour. De-fault probability is high.

Business climate rating definitionThe new rating is intended to assess overallbusiness environment quality in a country.More specifically, it reflects whether corpo-rate financial information is available andreliable, whether the legal system providesfair and efficient creditor protection andwhether a country’s institutional frameworkis favourable to intercompany transactions.

A1 The business environment is very good.Corporate financial information isavail-able and reliable. Debt collection isefficient. Institutional quality is verygood. Intercompany transactions runsmoothly.

A2 The business environment is good.When available, corporate financial in-formation is reliable. Debt collection isreasonably efficient. Institutions gen-erally perform efficiently. Intercompanytransactions usually run smoothly in arelatively stable environment.

A3 The business environment is relativelygood. Although not always available,corporate financial information is usu-ally reliable. Debt collection and theinstitutional framework may have someshortcomings. Intercompany transac-tions may run into occasionaldifficultiesin an otherwise secure environment.

A4 The business environment is accepta-ble. Corporate financial information issometimes neither readily available norsufficiently reliable. Debt collection isnot always efficient and the institu-tional framework has shortcomings. In-tercompany transactions may thus runinto appreciable difficulties in an ac-ceptable but occasionally unstableenvironment.

B The business environment is mediocre.The availability and the reliability ofcorporate financial information varywidely. Debt collection can sometimesbe difficult. The institutionalframeworkhas a few troublesome weaknesses.Intercompany transactions run appre-ciable risks in an unstable, largelyinefficient environment.

C The business environment is difficult.Corporate financial information is oftenunavailable and when available oftenunreliable. Debt collection is unpredict-able. The institutional framework hasmany troublesome weaknesses. Inter-company transactions run major risksin a difficult environment.

D The business environment is very diffi-cult. Corporate financial information israrely available and when availableusually unreliable. The legal systemmakes debt collection very unpredicta-ble. The institutional framework hasvery serious weaknesses. Intercompanytransactions can thus be very difficultto manage in a highly riskyenvironment.

SECTOR RISK OVERVIEW

xxvi

Sector risk overview

Christine Altuzarra and Dominique Fruchter

Economic Studies and Country Risk Department, Coface

Sector @rating – measures the average levelof default risk posed by companies in individ-ual sectors. A rating assesses the likelyimpact on short-term payment behaviour ofthe economic prospects and average corpo-rate financial position in a particular sector.To establish a rating, Coface uses threeevaluation criteria:• business trends in the sector, which

reflect how market prospects, price levelsand production costs might influence com-pany solvency;

• average financial position of compa-

nies in the sector, which reflects theability of companies to cope with economicdownturns;

• payment behaviour in short-termtransactions, as reported by Cofacedatabases.

Coface establishes sector @ratings on 10levels – ranging from A+ for the lowest risksto D for the highest.

Sector @ratings are complementary to@rating credit opinions on individual com-panies and country @ratings.

Scale of sectoral risk: WORLD

Textiles

Electronic components / Steel / Telecommunications (oper)

Telecommunications (equip.)

D

C+

C–

B–

A

C

A+

A–

B

B+

Highest risk

Lowest risk

Clothing

Paper / Mechanical engineering / Mass retail /

Pharmaceuticals / Chemicals

Building & public works

Air transport / Car industry / IT

industry


xxvii

WORLD SECTOR RATINGS

2004 2005 2006 2007 2008Outlook

Electronic chips A+ A A A ASteel A A A A ATelecommunications (operators) B+ A A A AChemicals A B+ A- A- A-Mass distribution A- A- A- A- A-Mechanical engineering A- A- A- A- A-Paper A- A- A-➚ A-➚ A-Pharmaceuticals A+ A A A- A-Telecommunications (mobileand network equipment)

B+ A- A- B+ B+

Construction & civil engineering A A A- B+ BAutomobile B+ B➘ B- B- B-Information technology B- B- B B- B-Air transport B- C- C+ B- B-Textiles C+ C C C C+Clothing C C- C- C- C

Several negative factors should affecteconomic sectors in 2008, with a signifi-cant economic slowdown developing inthe United States and to a lesser extentin Europe. Repercussions of the finan-cial crisis triggered last summer by theUS subprime mortgage meltdown willcompound the effects of less-dynamiceconomic growth. Companies can ex-pect to face stiffer credit conditions asa consequence. The crisis effects willnonetheless remain limited to sectors inor near the eye of the storm: construc-tion. Companies are moreover in rela-tively better financial shape that willgenerally enable them to cope withstricter financing terms and less-buoy-ant demand. This relatively positive’coping’ scenario could deteriorate ifthe US economy goes into recession.Although not considered the centralscenario by Coface, this possibilityshould not be shrugged off.

Several other elements will affect ec-onomic sectors, notably the rising costof raw materials, with oil prices inparticular reaching record levels atnear US$100 per barrel end 2007[Query:Please check the introduction of curre-

necy abbreviation for values here andin subsequent occurrences.]. Despitethe growth slowdown expected in theUnited States, demand from emergingcountries and the rising cost of theinvestments needed to increase produc-tion capacity has prompted producercountries to keep the pressure on prices.A hypothesis of an average price ofUS$80 per barrel in 2008 against US$72in 2007 results in higher costs for manysectors dependent on raw materials.Prices have also risen sharply for gas,metal, wood and agricultural products.Transport costs have moreover beengrowing rapidly. And the dollar contin-ues to trend down: the Federal ReserveBank’s reactivity as opposed to theEuropean Central Bank’s supposedwait-and-see stance on monetary policy,in conjunction with the growth outlookin the United States have kept thedownward pressure on the dollar. Theresulting strong euro has of courseundermined the competitivenessofEur-opean sectors.

Coface is nonetheless betting on thefirmness of economic conditions inemerging countries. It appears likely


xxviii

that this ‘disconnect’ will work in favourof many sectors. Companies in emergingregions are now driving textiles andsteel and have been moving upmarketand developing real strategies for con-quering markets.

The context outlined above for eco-nomic sectors in 2008 has promptedCoface to change world and regionalsector ratings as described below. De-spite the more difficult economic con-ditions, not all sector risk trends arenegative.

Negative trends• building and civil engineering: downgrade

world rating from B+ to B, western Europerating from B+ to B and the United Statesfrom B➘ to B-;

• mass distribution: negative watchlist forNorth America A- rating;

• paper-cardboard: remove world A- ratingfrom positive watchlist; negative watchl-ist western Europe B+ rating;

• clothing: downgrade Latin America ratingfrom 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 westernEurope rating from C- to C;

• clothing: upgrade world and western Eu-rope ratings concomitantly from C- to C.

Sectors rated A+, A, A-: The good eco-nomic environment prevailing in thesector has a positive influence on cor-porate financial health. Payment expe-rience has been satisfactory. Defaultprobability is low on average.

ELECTRONIC COMPONENTS (RATED A)

Electroniccomponents

World North America Japan Western Europe Emerging Asia

2008 forecast A A B+ B A

The components market has been sub-ject to wide and rapid price fluctuationsdue mainly to variations in stock levelsand shifts in price expectations. Thegrowth needs linked to consumer elec-tronics, mobile telephones and infor-mation technology has nonethelessbeen sufficiently strong and continuousto limit the negative repercussions oncompanies, which have nonethelesssought to reduce production costs bysubcontracting to low-cost countries,entering into partnerships and negoti-ating activity exchanges.

Semi-conductor billings rose about 4 percent against 10 per cent in 2006, with thedownward price trend – down 9 per cent onaverage – more than offset by the growth ofsales volume, up 10 per cent). Billings shouldaccelerate in 2008, increasing 9 per cent.While sales volumes should grow strongly,the decline of prices should ease with the end

of the destocking process, slower develop-ment of production capacity and the benefi-cial effect on demand of the Americanelections and the Olympic Games. Asia (in-cluding Japan) will remain the most dynamicmarket, representing about 46 per cent ofsales. North America and Europe with,respectively, 40 and 15 per cent, will lagbehind due to the economic slowdown andthe sluggishness of some market segmentslike the car industry andtelecommunicationsnetworks. Europeanplayers,meanwhile,willcontend with unfavourable exchange rates.

In this context, three structural trends willpersist:• Partial or total sell-off of components

business lines by large groups whethervia initial public offerings (Qimonda byInfineon or Spansion by AMD) or sales toprivate equity funds (MotorolaandPhilipscomponents divisions, now, respectively,Freescale and NXP).


xxix

• Increasing reliance on subcontractors, es-pecially Asian, for manufacturing,control,packaging and shipping, with the soaringcosts of research & development andproduction equipment making it difficultto run integrated manufacturing opera-tions, except for major players, like Intelwith its new factory in Arizona.

• Strategic agreements on alliances, likethe one between Intel and ST Microelec-tronic in NOR-type flash memories, and

exchanges or transfers of activitiesprompted by a more competitive market –epitomised by the price warovermemoriesbetween Intel and AMD – that no longerallows companies to pass on rising produc-tion costs in sales prices as easily as inthe past. This has an impact on margins,but these nonetheless remain comfortableon the whole.

STEEL (RATED A)

Steel World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica

Middle East,North Africa

CIS

2008 forecast A A A A B+ B+ A A A

Upgrade emerging Asia rating from B to B+The situation should remain favourable in2008 despite a slight world economic slow-down. Transport, mining, oil exploration, en-ergy production and delivery, as well asconstruction (public works and non-residen-tial) will remain buoyant consumer sectors.The so-called BRIC demand (Brazil, Russia/Ukraine, India and China representing 40per cent of the world market), much likeotheremerging regions, should continue to growrapidly. World production, with 7 per centgrowth expected in 2008 against 9 per cent in2007 will struggle to keep pace despite itsstrong development in those same BRICcountries (up 11 per cent in 2008 after a 13per cent in 2007). Chinese exports, whichhave developed strongly, should mark timedue to trade pressure from both the UnitedSates and Europe and to the smaller pricedif-ferential between regions. It should thusagain be possible to pass on a large proportionof the further cost increases expected for in-puts (iron ore, scrap iron, coal, coke, freight)in sales prices, which should rise on average10 per cent.

In this context, steelmakers will continuetodevelop their productioncapacityparticularlyin emerging regions with growingdemand,es-pecially those endowed with raw material re-sources (energy, iron ore, coal). They will not,however, abandon developed regions sincetheir markets – weak growth notwithstand-

ing – are nonetheless still large and harbourvery sought-after producers of specialitysteels. Soaring freight costs and the inade-quacy of the world fleet continue to justifymaintaining a steel industry in every regionwith the major steelmakers seeking to diver-sify their clientele via a worldwide presenceand a sufficiently diversified offer and to pen-etrate profitable niche markets (steel ductsfor transporting hydrocarbons, specialitysteels and so on).

Asia: a strong growth marketDemand for steel in China, one-third of theworld total, should grow another 11 per centin 2008, spurred by ongoing investment in in-frastructure (dams, ports, railways, electricpower stations) and construction as well asbythe development of the car, mechanical engi-neering, shipbuilding and home appliance in-dustries. Despite rapid development ofproduction capacity, local prices will continueto rise sharply due to an insufficientdomesticsupply in several product categories. In thewake of the 2008 Olympic Games, the growthof demand will nonetheless bear particularlyclose watching to check whether it keeps pacewith the expansion of supply.

Steel production is still dispersed among amultitude of companies with the 10 largestrepresenting only 35 per cent of the total de-spite the evident commitment of governmentofficials to remedy the situation. Many of

COFACE LAUNCHES A NEW ‘BUSINESS CLIMATE’ RATING

xxx

those companies are small in size and notvery productive, and although privatelyowned they have benefited from the solici-tude of local governments.

Production in India should be up 12 percent in 2008 against 14 per cent in 2007, butremain nonetheless far below the level inChina. It will struggle to keep pace with theexponential development of the needs of pub-lic works, mechanical engineeringandthecarindustry, thus spurring further price in-creases. The abundant presence of excellentquality iron ore is an asset that governmentofficials seek to exploit locally by imposingex-port duties and developing domestic produc-tion. It has also emboldened Indiansteelmakers to burst onto the world scenewith acquisitions of manufacturers not bene-fiting from such resources: Corus by TataSteel, Algoma and Minnesota Steel by EssarSteel.

In Japan, Korea and Taiwan, 2007 willprove to be another good year – in both vol-ume and revenue terms – for local playerswho have taken advantage of excellent busi-ness conditions in shipbuilding and the carindustry (exports) to raise prices. Two crucialfactors have facilitated matters for them: thelimited market penetration by foreign prod-ucts and their close ties with users as regardsboth specific production requirements andsupply. Through cross-shareholding, eg be-tween Nippon Steel and Posco or betweenNippon Steel, Sumitomo and Kobe Steel andbuyouts of the weakest among them (OjiSteelby Nippon Steel), they have been able to pro-tect themselves from foreign takeover bidsal-beit with the risk of arousing suspicions ofprice collusion (an investigation began in Ja-pan in autumn 2007). The industry shouldhave another good year in 2008 with stronggrowth continuing in the region.

TELECOMMUNICATIONS − OPERATORS (RATED A)

Operators World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast A A- A+ A A A A A+ A

The earnings performance of fixed teleph-ony, mobile telephony and Internet opera-tors, particularly European, will continue tosuffer in 2008 from competition and from theinvestments they make to stake out positionsin emerging countries where they find newsources of growth. The allocation of frequen-cies for development of 3G communications,the port of entry to broadband mobile Inter-net should lead the operators chosen to investmassively in the construction of the networksassociated with that new technology. The ar-

rival in the sector of Internet heavyweightslike Google will spur efforts to form alliancesby operators and equipment manufacturersalike. The Japanese and Korean markets arenot only the most saturated but also the mosttechnologically advanced. The players havethus been engaged in cut-throat competitionover high value-added services and as a re-sult in a race to innovate. China, India andBrazil constitute very promising marketswhere powerful players have beendevelopingstrongly.

CHEMICALS (RATED A-)

Chemicals World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast A- A-➘ A A- B+ A B+ A+ B+


xxxi

Favourable business conditionscontinuetoprevail in the sector notwithstanding a mildslowdown in North America. The strength ofdemand from net-importing emerging coun-tries, particularly China and India, has beena positive factor. The sector has largely beenable to pass on raw materialprice increasesto

buyers even if the downstream industry con-tinues to experience difficulties on that score.The overall financial health and profitabilityof sector companies has remained good inthat context with ongoing restructuring acontributing factor.

MASS DISTRIBUTION (RATED A−)

Massdistribution

World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast A- A-➘ A- A- B+ A A A A

North America A- rating negative watchlistedSteady buying by European and Japaneseconsumers and especially the voracious pur-chasing of consumer goods in emerging coun-tries should offset the householdconsumption slowdown expected in theUnited States in 2008. Large European andAmerican groups that have internationalisedtheir operations should be the main benefici-aries. The stiff competition between majorbrands, the increased pressure exerted byhard discount and the rising cost of rent, ship-ping, energy and agricultural raw materialswill continue to squeeze margins. Thosegroups have sought to protect their marginsby diversifying their sales formats (hard dis-count, mini-markets), launching chains ofspecialised shops (clothing, sports goods, do-it-yourself, home appliances) and developingtheir own brands and service offers (travel,credit, telecommunications).

North AmericaIn the United States, after generally goodperformance in 2006 and the first three quar-ters last year, the slowdown of consumption

late 2007 and in 2008 should affect the sectorto varying degrees. Department stores speci-alised in the high end will be relatively unaf-fected by the decline in consumption.Conversely, players focusing on middle- orlow-income clientele will fare less well. Wal-Mart should continue to underperform duenot only to the high proportion of middle- andlow-income households in its clientele butalso to the competition from Target, TJX,Dress Barn and Costco in textiles and fromspecialty shops ingeneral.Chainsspecialisedin do-it-yourself, construction materials, gar-dening, home furnishings (furniture and ap-pliances) have been or will be suffering fromthe repercussions of the property sector slow-down. Supermarket food distribution shouldsuffer relatively less despite the persistenceof intense competition and the price increasesimposed by the food industry. Althoughneighbourhood stores, including dollar storesand drugstores, should continue to performwell, they will be increasingly faced with thediversification of discounters and supermar-kets into small-sales formats.

MECHANICAL ENGINEERING (RATED A-)

Mechanicalengineering

World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

2008 forecast A- A- A A- B+ A


xxxii

The slight world economic slowdown ex-pected in 2008 will have only a moderate ef-fect on mechanical engineering markets withsector activity supported by still satisfactorylevels of corporate investment in industriali-sed countries and especially by the con-

tinuing dynamism of emerging countries,above all China, which should allow the sec-tor to partly offset the increasing cost of rawmaterials. Corporate solvencyshouldthusre-main satisfactory in 2008 with non-paymentrisks remaining limited in consequence.

PAPER INDUSTRY (RATED A-)

Paper industry World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica

2008 forecast A- A- A B+➘ A- A A-

World A- rating removed from positivewatchlist and the Western Europe B+rating negative watchlistedDemand for paper products has slumped indeveloped markets. The sector has probablypassed the cyclical peak with sales priceshaving managed only a modest increasebarely sufficing to offset rising input costs.Strong consumption growth in Asia andotheremerging regions in conjunction with bettercontrol over production capacity have none-theless resulted in a better balance betweensupply and demand.

Papermaker profitability varies widely ac-cording to factory location, production typeand the situation in the industry. Countrieswith extensive forest cover like Russia andChile and perhaps a climate that speeds upthe harvest cycle (Asian and Latin Americanintertropical regions) have attracted themajor Scandinavian and North Americanplayers by virtue of their abundant rawmaterial resources, especially with such hostcountries often located inproximitytorapidlydeveloping markets. The EUR and CAD/USD parity trends have had a disruptiveinfluence on world paper-product trade. Al-though benefiting American exports to thedetriment of the Europeans, it also increasesthe cost of pulp supplies (dominated by theCanadians and Scandinavians) to Americanpapermakers. Pulp producers or even sani-tary, household or technical paper manufac-turers, less sensitive to economic downturns,have generally achieved higher profitabilitythan newsprint or printing and writingpapermanufacturers. Paper and cardboard proces-sors like stationery and packaging manufac-

turers faced with direct pressure from massdistribution often present higher levels ofrisk.

Western EuropeIn Western Europe, despite a 10 per centexport decline in the 2007 first half largelyattributable to the euro appreciation, a mod-erate 2 per cent increase in demand inconjunction with better control over produc-tion capacity resulted in a slight increase inthe average price for printing and writingpaper in 2007. The increase in prices anddemand was concentrated, however, oncoated and uncoated wood-free paper in-tended for use by companies for communica-tion purposes. Conversely, prices fornewsprint and wood-coated paper for maga-zines were flat. Activity in paper and card-board for bags and boxes continued to trendup in 2007 due to the strength of the economy.Prices for fluting and backlining for card-board thus increased sharply. Brown paperprices, however, were stable.

In 2008, amid the still unfavourable trendon foreign trade and the domestic economicslowdown, prices for paper intended forprinting/writing and packaging should leveloff with newsprint prices declining.

The overall increase in prices has notsufficed to completely cover increasing inputcosts, a trend whichcould,however,continue.There are thus still risks of payment inci-dents, particularly in processing and whole-saling. Packaging, a segment with adispersed industrial fabric – the five largestplayers represent just 40 per cent of produc-tion – has been contending with the loss of


xxxiii

business attributable to the growing propor-tion of imports in consumer goods and to thepressure exerted by food industry playersfacing their own problems in dealing withrising raw material costs. Stationary hasbeen subject to similarly strong pressurefrom mass distribution. Besides the smaller

companies sometimes compelled to ceaseoperations, major Scandinavian playershavenot hesitated to shutdown production facili-ties that paradoxically are sometimes ac-quired at a good price by private equityfunds. Such shutdowns are the only way toreduce overcapacity and bolster prices.

PHARMACEUTICALS (RATED A-)

Pharmaceuticals World North

America

Japan Western

Europe

Emerging

Europe

Emerging

Asia

Latin

America

Middle East,

North Africa

CIS

2008 forecast A- A- B+ A- B

(wholesale/

retail)

A A-

(wholesale/

retail)

B

(wholesale/

retail)

B

(wholesale/

eptail)

The world pharmaceuticals market willgrow moderately in 2007, up 6 per centaccording to IMS Health. The growth shouldcontinue at essentially the same rate in 2008,up 5 per cent (US$735 billion). The expiry ofnumerous patents has undermined sales ofblockbuster drugs while spurring genericdrug sales (15 per cent market share).Traditional laboratories in industrialisedcountries have been subject to intense pricepressure that erodes margins. To improveproductivity they have invested heavily inR&D. Faced with a dwindling flow of new

drugs in the pipeline they have been optingto outsource research. Emerging regionsconstitute new sources of growth that cur-rently contribute as much as 25 per cent tothe expansion of the world market. But therisks, particularly in relation to industrialproperty, have proven to be significant. Theindustry will thus experience a movement ofconcentration with asset sell-offs remainingcommonplace. Although the margins of sec-tor players – even those of the strongestlaboratories – will thus be under pressure,they will nonetheless remain at good levels.

TELECOMMUNICATIONS – EQUIPMENT MANUFACTURERS (RATED B+)

Equipmentmanufacturers

World North America Japan Western Europe Emerging Asia

2008 forecast B+ B+ B+ B+ B+

Sectors rated B+, B, B−: The essen-tially good economic environment inthe sector is not exempt from short-termdeterioration with negative repercus-sions on corporate financial health.Pay-ment experience has been generallycorrect and default probabilityacceptable.

Growth will substantially benefit againthis year from Internet and emerging marketdynamism. The intense competition due es-

pecially to the increased presence of Chineseplayers will, however, affect prices and mar-gins. The sector concentration process willcontinue in that context while companies willgive preference to subcontracting productionand not hesitate to relocate other functionslike research to low-cost regions. They willpursue diversification into services, wherenecessary via alliances with software andcontent editors.


xxxiv

BUILDING AND CIVIL ENGINEERING (RATED B)

Civilengineering

World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast B B- B- B A- A- B+ A A-

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

After several euphoric years, residentialconstruction has been in decline in theUnitedStates, Spain, Italy, Ireland and Denmark.The segment has been decelerating sharplyor has stopped growing in the United King-dom, France, Finland and Norway. A slow-down is expected in Canada, New Zealandand probably, Australia. The residentialsegment will only continue to grow in Swe-den. In Germany and Japan, meanwhile,there has been no sign of a recovery in asector that has been stagnating for manyyears.

Non-residential construction–offices,com-mercial premises, industrial facilities – hasbeen holding up well even with a slowdownlooming in the United States, United King-dom, Spain, France and Ireland in view ofthe price levels reached and a less-buoyanteconomy. Conversely, Japan and Germanyhave continued to recover.

In emerging countries, ‘bubbles’ have de-veloped in large urban centres raising fearsof sudden collapse. At this juncture,however,the overall construction sector has beengrowing very strongly with the boom condi-tions mainly attributable to high-economicgrowth, supply shortages, middle class de-velopment, Westernisation of lifestyles, therural exodus and the liberalisation of credit.Other contributing factors include the open-ing up of capital markets, abundant low-costliquidity and the influx of foreign playersattracted by the prospect of good returns.

The margins of companies highly involvedin residential construction, and more broadlyin the housing market, will feel the effects ofthe business downturn. That is already thecase in the United States and will also likelyconcern Spain, the United Kingdom, Franceand Ireland. The companies concerned in-clude promoters, builders, craftsmen, estate

agents, building materials and home furnish-ings agents. The credit crunch in conjunctionwith the business downturncouldprovefatal,particularly for those having taken on heavydebt as in leveraged buyouts. Although themajor players should be able to ride out thestorm, thanks to diversification ingeographicterms (presence in emerging countries) andsectoral terms (non-residential,publicworks,motorway and airport concessions, energyproduction), the multitude of small playerswill suffer to a greater extent.

North America: continued decline ofresidential constructionIn the United States, spending on construc-tion was down 10 per cent in 2007. That isthe natural consequence not only of the 20per cent decline in residential property in-vestment – which represents about half thetotal investment – but also of the deteriorat-ing conditions in non-residential construc-tion with the economic slowdown producinga moderating effect on the office, commercialpremises and industrial facilities segment.Strong growth has only continued in publicworks (20 per cent of the total sector) andshould stay on track in view of the structuralflaws detected in many bridges and othersuch structures after the Minneapolis catas-trophe. Spending should decline again in2008, but less than in 2007 (down 6 per cent)with the residential segment bottoming outtoward year end. Non-residential construc-tion could, conversely, decline even moreamid the consumption and investment slow-down and a decline in local community taxrevenues.

The decline of residential property is at-tributable to the imbalance in housingsupplyand demand. Responding to demand from


xxxv

households spurred by both attractive loanoffers and capital gains perceived as sure,the new housing supply grew strongly from2001 to 2006. With high volumes and pricesbolstering profitability, promoters paid noheed to the weakening of demand triggeredin 2005 by several converging trends: exces-sive increases in prices, which doubled onaverage between 1997 and 2005 to reachlevels representing 3.8 years of averageincome against 2.8 in 2001, saturation ofneeds with the proportion of homeownersincreasing from 64 to 69 per cent in 10 years,and growth of the debt service burden with37 per cent of borrowers devoting over 30 percent of their gross income to spending onhousing, and 14 per cent of borrowers overhalf their income. The disastrous conse-quences of the financing system have com-pounded the effects of that marketimbalance. There are a multitude of financialinstitutions with neighbourhood offices spe-cialised in mortgage loans, which only act asintermediaries and may deal with minoritiesor operate in difficult areas. They maximisetheir commissions by marketing unconven-tional loans. The so-called Alternative A andsubprime categories constituted a third ofthe mortgage financing granted between2004 and 2006. Nearly all, however, areadjustable-rate mortgages after an initialtwo- or three-year period during which theborrower has to pay interest at rates alreadyvery high to compensate for the high-riskprofile. The central idea was that priceswould continue to rise and thus allow borrow-ers to refinance the mortgage or sell to repaybefore upward rate adjustments kick in andthe debt service burden becomes unsustain-able. When prices stopped rising the contrac-tual rate increases brought the system downlike a house of cards.

Market conditions will remain difficult.Many subprime loans granted in recent yearswill be subject to sharp, upward interest rateadjustments in 2008. Neither refinancingnorrepayment will be possible due to the priceerosion. Legislative measures intended toallow the FHA to insure financial institutionsthat agree to refinance that type of loan oraccord a temporary rate freeze will onlybenefit a limited number of households. In

such conditions, payment defaults and prop-erty repossession orders, already up sharplyon subprime mortgages (15 per cent indefault, 6 per cent subject to repossession),should rise further. This will result in anincrease in properties up for sale with de-mand meanwhile likely to weaken furtheramid the increasing cost and scarcity ofunconventional loans. The decline of priceswill thus in all likelihood accelerate withreductions of from 10 to 20 per cent by end2008 considered plausible. The marketshake-out will be unlikely to run its coursebefore the 2008 second half due to theproblem of eliminating the glut of unsoldproperty.

Europe: erosion of residential constructionA perceptible slowdown has emerged in theconstruction sector. That trend has beenconcentrated in the residential market dueto the exhaustion of solvent demand: therehas been a marked slowdown in mortgageloans and prices with the delivery of buildingpermits in decline. The dynamism of theprivate non-residential and public workssegments has partly offset that trend. Busi-ness should stabilise across the sector in2008 with erosion in residential constructionand a trend reversal in non-residential in acontext of slower economic growth. Publicworks should remain dynamic. Three coun-tries in Europe will particularly bearwatching:• With 75 per cent of households in the

United Kingdom owning their ownhomes and carrying debt representing160per cent of their annual income, theunfavourable impact of relatively highinterest rates on loans with 90 per cent ona adjustable rate basis, as well as thethreat the crisis poses to bonuses in theLondon financial sector, a price decline islikely in 2008. The British and Americanfinancing systems, furthermore, are simi-lar in some respects.

• In Ireland, where the residential markethas also experienced overheating, evenmore pronounced, thanks to the EuropeanCentral Bank’s (ECB’s) accommodatingpolicy, the market reversal has gainedmomentum with both prices and building-


xxxvi

permit applications in decline. As muchas 83 per cent of households own theirown homes and carry debt, mainly atvariable rates, representing 160 per oftheir annual income.

• Spain has been emerging from a 10-yearproperty boom. The average price for ahome has doubled in five years and tripledin 10 years with growth peaking at 17 percent in 2003/2004. The property debt ofhouseholds is equivalent to 80 per cent ofdomestic product and 140 per cent of theirdisposable income. The debt service bur-den represents 40 per cent of their incomewith 95 per cent of the debt taken out on

a variable rate basis. Fully 87 per cent ofthe population are homeowners. Sub-prime loans are non-existent and refi-nanced mortgages are estimated at 1 percent of outstanding loans. The default rateis still low at 0.5 per cent of outstandingloans. Past interest rate increases will,however, have a growing impact on thedebt service burden, and the decline innew home construction–400,000–500,000expected in 2008 – will affect employment.In a context of tightening credit, undiver-sified, debt-burdened small- and mid-sizeplayers with regional scope will be apt toexperience financial difficulties.

AUTOMOTIVE INDUSTRY (RATED B-)

Automotiveindustry

World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast B- C A B- B+ B+ B+ B+ B-

World car production will rise 4.5 per centin 2008. Emerging markets will post verystrong growth with China up 10 per cent,India 26 per cent, Thailand 19 per cent andBrazil 7.5 per cent. Their dynamism willcontrast with the persistent stagnation ofproduction in industrialised countries: up 0.5per cent in the United States, down 2.0 percent in Western Europe and up 0.3 per centin Japan. These three regions will nonethe-less continue to represent most of worldproduction (56 per cent). American andEuropean carmakers will continue to sufferfrom the household consumption slowdownand high petrol prices at the pump in theirmain markets. Environmental regulationsintended to reduce CO2 emissions will alsoaffect them. In emerging countries, the pri-mary bulwark of their growth, they will haveto contend with fierce competition in the low-

cost car segment. The persistence of highprices for certain inputs will continue tosqueeze their operating margins. TheirAsiancompetitors, above all Toyota, willstrengthen their positions, thanks to thecompetitive advantages they enjoy.

American and European parts manufac-turers will suffer greatly from the difficultiesaffecting carmakers. Their margins will con-tinue to be squeezed by rising raw materialcosts, pressure exerted by their clients onprices and the additional costs resulting fromthe R&D transfers carried out by carmakers.Leveraged buyouts, undertaken with in-creasing frequency in the sector in the 2007first half, could moreover undermine theirfinancial structure.

Chinese and Indian carmakers have beenstrengthening their positions locally and onexports to the growing Asian, Russian andLatin American markets.


xxxvii

INFORMATION TECHNOLOGY INDUSTRY (RATED B-)

Informationtechnologyindustry

World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


2008 forecast B- B- B- B- B+ B+ B+ B

The world IT market should suffer a slightslowdown in 2008. The growing importanceof emerging markets and, in maturemarkets,of the home segment compared to the officesegment argues for a rethinkingof strategies.The different players (designers, manufac-turers, subcontractors and distributors)haveto contend with the standardisation andrapid obsolescence of computer equipmentand the need to offer tightlypricedequipmentin emerging or developing regions. With the

resulting decline of average prices only offsetby even faster increases in sales volumes,and it prompts the transfer of production tocountries offering lower costs. The competi-tion on delivery times and after sales servicehas been fierce, making stock management adelicate balancing act. Although restructur-ing programmes have continued in thatcontext, they have nonetheless not succeededin overcoming the financial difficulties expe-rienced by some players.

AIR TRANSPORT (RATED B-)

Air transport World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica


CIS

2008 forecast B- C+ B- B B- B B- B+ B-

Although airline turnover will be up 8.2per cent in 2007, it will slow to up 6.5 percent in 2008. Freight, up 3.8 per cent in 2008after stagnating in 2007, will thus cope moreeffectively with the stiff competition from theother modes of transport. The airlines willreport profits of US$5.6 billion in 2007 andUS$7.8 billion the following year. The sharp9.6 per cent increase in the number ofpassengers has thus far offset price increasesfor fuel, which represents 28 per cent of totalexpenses. The sector will remain shaky in2008: a more sustained increase in the priceof fuel would weigh heavily on airline finan-cial performance, especially with the carriershaving accumulated debt exceeding US$200billion overall. This context exacerbates the

gravity of the problems associated with thearchaic national air traffic control systemsand airport infrastructure in some countries.The airlines will moreover have to renewtheir fleets, particularly in the United States.The Open Skies air liberalisation agreementthat comes into effect in April 2008 shouldoffer new opportunities for European andAmerican airlines previously not allowed tofly between Washington and Heathrow.

The major airlines will continue to sufferfrom the competition with low-cost carriers,which have increased their presence oninternational routes. Restructuring will thuscontinue in industrialised and emergingcountries at the expense of the weakestplayers.


xxxviii

Sectors rated C+, C, C-: The economicenvironment is very uncertain and un-likely to have a positive influence oncorporate financial health. Payment be-

haviour is relatively poor compared tothe previous rating categories. Defaultprobability becomes nettlesomeproblem.

TEXTILES(RATED C+)

Textiles World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica

North Africa,Middle East

CIS

2008 forecast C+ C B C B A B- B B

CLOTHING (RATED C)

Clothing World NorthAmerica

Japan WesternEurope

EmergingEurope

EmergingAsia

LatinAmerica

North Africa,Middle East

2008 forecast C C C- C B A- C+ B

TEXTILEUpgrade world rating from C to C+Upgrade western Europe rating from C- to C

CLOTHINGUpgrade world and western Europe ratings from C- to CDowngrade Latin America rating from B- to C+

The restructuring that marked the sector inEurope led to a selection of the strongestplayers. Their positioning on high value-added products will enable them to cope withthe effects of the elimination of quotas oncertain products made in China since 1January 2008 and with rising raw materialcosts. The euro appreciation against thedollarand the yen and the expected householdconsumption slowdown in Western Europeand the United States could affect their salesbut nonetheless without jeopardising theirfinancial structure.

In the United States, the household con-sumption slowdown will affect clothing sales.With a still-limited presence in the exportmarket, American manufacturers will beunable to significantly offset this unfavoura-ble domestic trend.

Companies in Mediterranean rim countrieswill continue to improve subcontracting-re-lated services and will continue to benefitfrom the geographic proximity of their orderissuers. Their move upmarket should miti-gate the effects of the economic slowdowns in

the countries of order-issuers and help fendoff Asian competition.

China and Asia in general will continue tobe the big winners from production transfers,even if the slump in American demand mayaffect some Chinese subcontractors. In India,the structuring of textiles and clothingaroundthe major local operators will continue. LatinAmerican countries, meanwhile, will continueto suffer from Asian competition while theirmarket share in American imports declineseven further.

In Europe in particular, industry com-panies have the wherewithal to copewith the impact from the lifting of quo-tas, the household consumption slow-down and rising raw material costs.

In the 2007 first half, production in theEuropean Union was up 2 per cent fortextiles and 5 per cent for clothing. Italyis the leader in the clothing sector andGermany in textiles.

In 2008, European companies that benefitfrom good financial health, like Spain’s Indi-tex and Mango and Sweden’s H&M, and that


xxxix

have pursued geographicdiversificationstrat-egies, particularly to emerging countries,while keeping control over creation and dis-tribution will be well positioned to cope withthe risks expected:• the return of Chinese competition with a

vengeance in the wake of the eliminationon 1 January 2008 of the quotas reintrod-uced in June 2005 to limit imports of some10 products made in China (The quotasimposed on China by other countries,including the United States, will onlydisappear on 1 January 2009);

• the household consumption slowdown inWestern Europe and the United States;

• the euro appreciation against the dollarand the yen, as well as Asian currencies

pegged to the dollar, which will also impedeEuropean exports, particularly from Italy.

The restructuring carried out in textileshas strengthened the finances of industrialcompanies. Their positioning on high value-added products will moreover limit the impactof rising prices for synthetic fibre and wool.This has been the case for weavers specialisedin technical fabrics (Germany and France),thanks to the buoyancy of client sectors, theslowdowns in residential construction andthecar industry notwithstanding. Industrialcom-panies that use cotton will continue to developin the face of price volatility. In textiles as inclothing, industrial companies will continueto be confronted with Asian competition.

1Europe andthe CIS

Outlook for 2008:Europe and the CIS 2

Albania 10Armenia 11Austria 12Azerbaijan 14Belarus 15Belgium 17Bosnia and Herzegovina 21Bulgaria 23Croatia 26Cyprus 30Czech Republic 32Denmark 37Estonia 40Finland 44France 47Georgia 51Germany 52Greece 56Hungary 59Iceland 64Ireland 66Italy 69Kazakhstan 73Kyrgyzstan 76

Latvia 77Lithuania 81Luxembourg 84Macedonia 86Malta 88Moldova 89Montenegro 91The Netherlands 92Norway 95Poland 98Portugal 103Romania 106Russia 111Serbia 115Slovakia 119Slovenia 123Spain 127Sweden 131Switzerland 133Tajikistan 137Turkey 138Turkmenistan 141Ukraine 142United Kingdom 146Uzbekistan 150

OUTLOOK FOR 2008

2

OUTLOOK FOR 2008

Europe and the CISJean-Louis Daudier, Dominique Fruchter, Christine Altuzarraand 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

2.6%2.9% 2.8%

3.8%

1.8%

1.1% 1.1%

2.0%1.6%

3.0%2.7%

2.1%

0%

1%

2%

3%

4%

5%

6%

7%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(e)

2007(e)

2008(f)

0

50

100

150

200

250

300

Economic growth (%)Payment incident index

Scale of sectoral risk: Western Europe

D

C+

C–

B–

A

C

A+

A–

B

B+

Highest risk

Lowest risk

Steel / Telecommunications (operators)

Mass retail / Mechanical engineeringPharmaceuticals / Chemicals

Paper / Telecommunications (equipment manufacturers)

Electronic components/ Air transport/Building & public works

Car industry / IT industry

Textiles / Clothing

Economic growth of the main western European countries (%)

3.4

3.8

3.2 3.1

2.6

1.9

2.6

1.8

2.73.0

2.82.5

2.0 1.9 1.9 1.9

1.4

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sweden Spain Austria United Kingdom Belgium France Germany Italy Western Europe

2007 (e) 2008 (f)

After growth peaked in late 2006 and early2007, the Western European economy wentinto a moderate slowdown. This trend thusbegan before the emergence of the summerfinancial crisis, and it will continue this yearwhile credit conditions have deterioratedandseveral financial institutions in the regionhave experienced difficulties. Residentialconstruction, a major growth driver in recentyears, has slowed markedly with a downturnlikely. The impact will be substantial ineconomies where the housing market hadpreviously experienced runaway growth asin Spain, the United Kingdom and Ire-land. Exports outside Europe will come upagainst unfavourable exchange rates and theAmerican economic slowdown. Continuingstrong demand from emerging countries willnonetheless ease the trend. Intra-Europeansales, meanwhile, will be affected by the lessdynamic economic conditions prevailing inEurope. Only the United Kingdom’s sales toits European trading partners could be moredynamic due to the more favourable poundsterling/euro parity. European householdconsumption overall should also slow amidrising energy and food costs and slower jobgrowth. However, continued relatively ac-commodating fiscal policies, despite an in-complete return to balanced public sectoraccounts, as well as the continuing satisfac-tory job picture, will mitigate the negativeimpact of the tighter conditions of access tocredit. Households in some countries − nota-bly Germany, France, Portugal, Alpine coun-

OUTLOOK FOR 2008

3

1

tries and Sweden − will maintain or increasetheir spending.

Although corporate payment behav-iour has been generally good in WesternEurope, there are nonetheless pocketsof difficulty in some countries andsectors.

While almost all regional countries arerated A1, Italy, Portugal and Greece arestill rated A2 due to the customary slowpace of payments and collection of past-duepayments. Even Luxembourg only war-rants an A2 rating for its business climatedue to the difficulty in obtaining corporatebusiness information.

Textiles and clothing earned an upgrade(from C− to C) in 2007, reflecting the gradualconsolidation of the corporate fabric andvirtual completion of the production reloca-tion process. They nonetheless remain riskysectors in view of the elimination of the lastimport barriers and the pressure exerted bydistributors.

Air transport (rated B) − although bene-fiting from the recovery of traffic and theabsence of significant overcapacity − has tocontend with the rising cost of fuel, competi-tion from low-cost carriers and the comple-tion of restructuring entailing takeovers ofthe former national airlines of several re-gional countries.

The automotive industry (rated B−) hasto cope with eroding sales and comply withenvironmental standards, while the IT in-dustry (also rated B−) and telecommuni-cations equipment (rated B+) remainexposed to growing competition from newChinese players.

The economic slowdown could more-over result in moderate deterioration inthe payment behaviour and creditwor-thiness of certain companies with somecountries or sectors particularlysensitive.

Several countries rated A1 − Spain,the United Kingdom, Ireland and Ice-land − have been negative watchlisteddue to the sharp downturn ofresidentialconstruction activity after 10 exuberantyears. Payment behaviour could thusdeteriorate in the sector.

■ Some economic sectors will presenthigher levels of risk

Housing-related sectors (promotion, con-struction, materials, equipment, furnitureand electrical appliances) − whether in man-ufacturing, distribution or installation − willcertainly suffer from the downturn in resi-dential investment.

Road transport will have to cope withthe economic slowdown and the increasingcost of petrol.

Food industries, as well as breeding, stillsubject to pressures exerted by mass distri-bution, will suffer from the soaring prices ofraw materials. Biscuit-makers, flour mills,cheese-makers and meat processing willsuffer the most.

The leisure industry (catering, hotels,culture and entertainment) could suffer fromthe relative sluggishness of consumption andtourism originating in the United States.

The IT industry will come against theunfavourable exchange rate trend and theslowdown of corporate investment, especiallyin the financial sector.

CENTRAL EUROPE and TURKEY

■ Despite a more uncertain worldeconomic environment growth shouldremain buoyant in 2008

Regional growth will slow very moderatelyin 2008, down from 6.0 per cent to 5.2 percent on average. The slowdowns that devel-oped in Hungary and Turkey in 2007 afterthe implementation of restrictive policiesshould give way to gradual recovery with theimpact of those measures waning. In the restof the region, buoyant domestic demand −spurred by wage growth, a brighter jobpicture, funding provided by the EuropeanUnion and foreign investment − should sub-stantially offset the effects of the stifferconditions of credit and the slowdown ofdemand from Western Europe. RegionalGDP growth should remain 3 points abovethat of Europe of the 15, reflecting thecontinuing catch-up process under way inCentral European economies.

Economic growth should speed up to 3 percent in Hungary and 5 per cent in Turkey,a gain of one point over 2007. It should only

OUTLOOK FOR 2008

4

slow slightly in Romania (5.2 per cent) amidcontinued expansionary policy as well as inSerbia (6.0 per cent) and Bulgaria (6.0 percent), buoyed by dynamic investment andconsumption. Poland (5.2 per cent), theCzech Republic (4.6 per cent) and Slo-vakia (7.0 per cent) should shed slightly over

one point of growth compared to the previousyear. Slovakia should nonetheless keep thetrophy for dynamism along with the BalticStates, notwithstanding significant eco-nomic slowdowns in most of these statesunder the effect of measures taken to easeoverheating.

GDP growth (%)

0

2

4

6

8

10

Slovakia Bulgaria Serbia Romania Poland Turkey CzechRepublic

Hungary

2007 e 2008 f

■ Inflationary surges and still-large publicsector deficits have compromised thechances of most new member states ofadopting the euro in the near future

After Slovenia, in early 2007, Cyprus andMalta received approval to join the euro zonein January 2008. Although public sectoraccounts in the Baltic States − members ofthe ERM2 − and Bulgaria are near equilib-rium, or even show surpluses, inflation inthose countries has been very high, thusdeferring adoption of the euro beyond 2010.Slovakia, which also belongs to ERM2 andwhich revalued the central parity of itscurrency in March 2007, is on the verge ofmeeting the Maastricht fiscal criteria andthus seems ready to adopt the euro inJanuary 2009 as planned. This prospectseems much farther off, however, for theother new members, notably Hungary,which has not met any Maastricht criterionthus far. Most of the others either do nothave or no longer have an official target datefor joining the euro zone, and it now appearsdifficult to achieve before 2013/2014.

Public deficit (%of GDP)

-7-6-5-4-3-2-101234

Bulgaria Serbia Turkey Slovakia Romania PolandCzech

Republic Hungary

2007 e 2008 f

■ Current account deficits have widenedand foreign debt has increased. Thevulnerability of many regional countriesto swings in market sentiment hasremained relatively high

The financial crisis linked to American mort-gage loans has only had a limited impact onCentral European countries thus far. Withfew exceptions, notably Romania, regionalcurrencies have grown stronger since thefinancial turbulence last summer. A softlanding for the region’s weaker economiesremains the most likely scenario at thisjuncture.

OUTLOOK FOR 2008

5

1

Emerging European countries, nonethe-less, remain among the most vulnerable to acrisis of confidence in the markets. In someeconomies, the size of the current accountdeficits and the excessive level of foreign debt− mainly private − could lead to suddenadjustments in exchange rates or economicgrowth in case of increased aversion toemerging risks. While most other emergingregions run current account surpluses, Cen-tral Europe runs deficits representing 7.7 percent of GDP on average. While remaininglimited in Slovenia, Poland and CzechRepublic (between 3.0 and 4.5 per cent ofGDP) or declining sharply in Slovakia (4.5per cent), the current account deficits haveremained large in Hungary, Croatia andTurkey (between 6.0 and 8.0 per cent) andhave reached peak levels in Romania, Bul-garia, Serbia and the Baltic States (be-tween 13 and 20 per cent). These very largeimbalances will be difficult to sustain in thelong haul, especially with the deficits some-times covered by appreciable inflows of vola-tile capital − short-term debt, portfolioinvestment − and a slowdown of FDI expectedas a result of the completion of the privatis-ation programmes.

A current account deficit that has

deteriorated dangerously (% of GDP)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2001 2002 2003 2004 2005 2006 2007 2008

Central Europe Emerging Countries

Although public sector debt has beentrending down in many cases, the wideningof the current account deficits has beencoupled with strong growth of the privateforeign debt whether due by companies orbanks. Some of the financing comes from theparent companies of subsidiaries operatingin Central Europe, which reduces somewhatthe risk of non-renewal of these inflows. Butthe debt also involves bank credit, securitiesissues and non-resident deposits. The foreign

debt burden has reached very high levels inLatvia, Estonia, Hungary,Bulgaria,Cro-atia and even in Slovenia with debt to GDPratios ranging from 85 to 110 per cent). Thestrong growth of foreign-currency loansgranted by domestic banks has heightenedexchange rate risk in several cases.

External debt ratios higher than the

emerging country average (% goods

and services exports)

0%

50%

100%

150%

2001 2002 2003 2004 2005 2006 2007 2008

Central Europe Emerging Countries

■ Payment incident frequency has easedbut payment behaviour remains volatile

Several years of strong growth and theprogress accomplished in restructuring theproductive apparatus have resulted in im-proved corporate payment behaviour in theregion, albeit still more volatile than inWestern Europe. This overall trend does notpreclude either occasional payment defaultsin weak or highly competitive sectors ofregional economies or an upsurge in paymentincidents in case of a marked growth slow-down. Companies in a range of sectors,including electronics, telecommunications,IT industry, the automotive industry andpharmaceuticals, often subsidiaries of majorgroups, have generally continued to benefitfrom the buoyant economic conditions. Theconstruction sector seems riskier, notably incountries that have experienced propertybooms or are currently in a slowdown phase.Agriculture and agri-food industry, in theprocess of restructuring, thanks to Europeanaid and especially textiles, are still shaky.The consumer goods sector has suffered somedifficulties notably in Hungary and Roma-nia amid declining household demand orrising interest rates in a context of highcorporate debt.

OUTLOOK FOR 2008

6


2.5% 2.5% 2.3%

4.0%

3.0% 3.1%

4.3%

5.6%

4.8%

6.3%6.0%

5.2%

0%

1%

2%

3%

4%

5%

6%

7%

1997

1998

1999

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7 (e

)

200

8 (f

)

0

50

100

150

200

250

300Economic growth (%)

Payment incident index

■ The business climate has improvedmarkedly but deficiencies persist

The business environment in Central Euro-pean countries is favourable overall. It im-proved substantially during the European

Union accession process. The countries thathave made the most progress on reforms,like Hungary, the Czech Republic andSlovakia, are also the leaders on businessenvironment quality. Countries with poorerquality corporate financial information andless legal protection for creditors or less-developed infrastructure and sometimes ahigher level of corruption, like Poland andmost Baltic States, present a higher butnonetheless satisfactory level of risk. Thisapplies even more to Romania, Bulgariaand Turkey, where a major effort is partic-ularly necessary to strengthen the anti-corruption campaign and legal systemeffectiveness. The deficiencies in the institu-tional environment are, moreover, greater inthe other Balkan States.

Business climate rating: Central Europe & Turkey

Cypru

s

Estonia

Hungary

Malt

a

Czech

Rep

.

Slova

kia

Slove

nia

Croati

a

Lithu

ania

Latvi

a

Poland

Bulgaria

Roman

ia

Turkey

Albania

Bosnia

Herze

govin

a

Mac

edon

ia

Serb

ia

A1

D

C

B

A4

A3

A2

■ Country @rating trendsThe region presents generally low risks. Theratings of the main regional economies,except Turkey, rated B, range from A2 toA4. The risk of deterioration in the economicenvironment triggering a wave of paymentdefaults remains very moderate. The situa-tion of individual companies dependsprimar-ily on the economic sector.

Although the repercussions of the tur-bulence that buffeted financial markets in2007 have remained very limited in theregion, the situations of countries with

difficult-to-sustain external deficits and pri-vate sectors highly exposed to exchangerate risk, nonetheless, remain weak. Inthat context, Hungary, whose rating wasdowngraded in 2006, retains its A3 ratingand Turkey’s B rating also remains un-changed. In 2007, the A2 rating of Es-tonia, A3 of both Latvia and Lithuaniaand the A4 ratings of Romania and Bul-garia were all negative watchlisted dueto economic overheating risks and theirgreater vulnerability to a change in marketsentiment. Conversely, Poland’s A3 rating

OUTLOOK FOR 2008

7

1

was positive watchlisted in view of thesolidity of its growth, the improved cred-itworthiness of Polish companies and thelimited extent of its external imbalances.

Cyprus and Malta, authorised to join theeuro zone in January 2008 and with theireconomies beginning to grow again, havebeen upgraded to A2.

COUNTRY @RATING RANKING FOR THE REGION’S PRINCIPAL ECONOMIES

January2002

January2003

January2004

January2005

January2006

January2007

January2008

Czech Republic A3 A3 A2 A2 A2 A2 A2Hungary A2 A2 A2 A2 A2➘ A3 A3Poland A4➘ A4➘ A4 A3 A3 A3 A3➚

Slovakia B A4 A3 A3 A3 A3 A3Romania B B B B A4 A4 A4➘

Bulgaria B B B B➚ B➚ A4 A4➘

Turkey C C B B➚ B➚ B BSerbia D D D C C C C

COMMUNITY OF INDEPENDENT STATES

■ Strong growth spurred by high rawmaterial prices …

GDP growth higher than the

emerging country average (%)

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008

Emerging Countries CIS

Driven by the strong Russian economy androbust demand for raw materials, economicactivity in CIS countries should remainbuoyant with 7.0 per cent growth in 2008,down slightly from 7.7 per cent in 2007. Highgrowth should continue in Russia, thanks tobuoyant household consumption and invest-ment, and the more expansionaryfiscalpolicypursued during the current electoral period,with the December 2007 legislative electionsbeing followed by presidential elections inMarch 2008. Sectors not subject to foreigncompetition, like constructionandcommerce,have been driving the economy. There arenonetheless still weaknesses. The roubleappreciation has handicapped sectors ex-

posed to competition from imports: the carindustry, light industry and so on. Oil pro-duction volume has been slowing − up 2.2 percent in 2006 compared with up 11 per cent in2003 − as it has for gas production (up 1.0per cent in 2006 against up 4.0 per cent in2003).

The outlook is not as bright for Kazakhs-tan, likely to suffer in 2008 from the tightercredit conditions resulting from the sub-prime crisis, with Kazakh banks havingborrowed heavily abroad to finance a rapidexpansion of credit to the private sector. Thetighter credit conditions could significantlyslow consumption. Rising hydrocarbon, oreand grain sales abroad should continue todrive the economy. Economic growth couldthus be about 6.0 per cent in 2008, a markeddecline, however, compared with the approx-imately 10 per cent growth achieved onaverage in the past nine years.

GDP growth (%)

0

1

2

3

4

5

6

7

8

9

10

Uzbekistan Russia Kazakhstan Ukraine

2007 (e)

2008 (f)

OUTLOOK FOR 2008

8

Economic growth should remain above 7.0per cent in Uzbekistan, with the interna-tional and regional environments remainingvery good for the economy (high gold and gasprices, transfers from expatriate workers inRussia and strong demand from the lattercountry).

The Ukrainian economy should slow mod-erately to 6.3 per cent in 2008, down slightlyfrom 7.2 per cent in 2007, due to a possibledecline in metal prices − the country’s mainexport − and a further price increase forimported gas. The private sector could alsofeel the effects of tighter credit and borrowingconditions abroad.

■ … but a business climate lagging farbehind the good financial health

Business climate rating: CIS

Kazak

hstan

Russia

Armen

ia

Azerb

aijan

Georg

ia

Mold

ova

Ukrain

e

Belaru

s

Kyrghy

zstan

Uzbek

istan

Turkm

enist

an

A1

D

C

B

A4

A3

A2

No regional country has a business climaterating better than B. Where available, cor-porate financial information is often opaque.Corporate ownership also lacks transpar-ency. Debt collection is difficult. Althoughthe improvement in regulations in favour offoreign investors and lenders is undeniable,the rule of law remains uneven. Althoughvery high political risk generally compoundsthat far-from-reassuring business climate inCentral Asian countries, Kazakhstan isdistinguished by lower risk of instability anda better legal environment for foreign inves-tors. In Ukraine internal rivalries continueto undermine the political landscape in thewake of the early elections late September2007.

The Coface business climate rating forRussia is B, reflecting the deficiencies in therule of law and in debt collection possibilitiesand the lack of investment in infrastructure.The lack of investment moreover pervades

the entire economy with a low investmentrate of about 20 per cent ofGDP, partlyattrib-utable to the recurrent instability of propertyrights. The government’s tendency, mean-while, to expand its presence in the energyand manufacturing sectors could ultimatelyundermine management effectiveness.

Despite a policy of opening up to foreigninvestment, Kazakhstan’s business climateis rated no better than Russia’s. The currentsevere tensions between the consortium ledby Technip and government officials, as wellas the technical difficulties, will doubtless beovercome. Like the other Central Asian ex-Soviet regimes, however, corruption is wide-spread in Kazakhstan and exacerbated bythe presence of the revenues from oil exports.

Armenia (also rated B) has succeeded inmaking a radical transition to a marketeconomy, and the legal and institutionalenvironment is better than it is in the otherregional countries. Corruption is still, how-ever, a major weakness.

The business climate in Ukraine, Azer-baijan and Georgia warrants only a C rat-ing despite the significant improvementachieved in Georgia’s case. The level of cor-ruption is very high in the three countries,however, and the legal environment provideslittle security. Corporate financial informa-tion and ownership structure are oftenopaque. The other CIS countries are rated D.

■ Country @rating trendsWith a generally poor business climate forcompanies thus offsetting a strong overallfinancial position, the average country @rat-ing for the region still reflects a higher levelof risk than in the other emerging countries.Russia is still rated B. Despite the economicdynamism and strong financial position, thecountry continues to suffer from governanceshortcomings. The Coface payment incidentindex continues to improve. The lack oftransparency on corporate finances and own-ership remains, however, unsatisfactory andthe weakness of the legal system underminescollection possibilities. Kazakhstan has alsoretained its B rating with concerns over thesolidity of the banks and the effects of thetighter credit conditions offset by the govern-ment’s strong financial position and the

OUTLOOK FOR 2008

9

1

prospects associated with the increase in oilproduction. Despite a satisfactory financialposition, Ukraine has maintained its Crating due to a still-shaky political andbusiness environment along with a strongenergy dependency. High political risk inUzbekistan along with continual govern-ment intervention in trade, daily corporateactivities and the banking system still justi-fies maintaining the D rating.

In the region, only Georgia’s rating wasup-graded. Economic conditions have improvedsharply since the revolution of the roses in2003, thanks to significant progress on gover-nance, privatisations and implementation of amore stable macroeconomic framework,whichspurred an influx of foreign capital. Nonethe-less, the improvement has particularly bene-fited a minority of the population and therearestill major political uncertainties.


January2002

January2003

January2004

January2005

January2006

January2007

January2008

Russia B B B B B B BKazakhstan C➚ C B B B B BUkraine D D C C C C CUzbekistan D D D D D D D

EUROPE AND THE CIS

10

AlbaniaPopulation (million inhabitants) 3.1GDP (US$ million): 9,136

Country @rating: DMedium-term rating: High riskBusiness climate rating: C

RISK ASSESSMENTGood performance in the export market andmanufacturing in 2007 offset the repercus-sions of an electricity shortage and drought.Growth should accelerate slightly in 2008driven by strong domestic demand and in-creased public sector investment. The eco-nomic dynamism, substantiallyunderpinnedby higher direct investment inflows, devel-opment of the financial sector and a substan-tial volume of expatriate workerremittances,made it possible to significantly raise livingstandards in the country, even if it remainsamong the region’s poorest.

The government will, however, have totake pains to quickly consolidate the nationalelectric power company’s financial situation,restructure the energy sector and containrising public spending in 2008 to limitinflationary pressures. The rapid credit ex-

pansion will also bear watching notwith-standing the limited development offinancialintermediation. While the country continuesto suffer, moreover, from the lack of diversi-fication of its exports (centred on textiles),the volume of imports has continued to growdue to an inadequate domestic supply andrising energy costs. Albania has muchgroundto make up, furthermore, on infrastructuredevelopment and improvement of the busi-ness environment, which includes combatingcorruption and organised crime.

Politically, the government should hence-forth have a free hand to implement itsreform programme. The election by parlia-ment in July 2007 of a president from theranks of the ruling Democratic Party ofAlbania strengthened Prime Minister SaliBerisha’s position and avoided the holding ofearly legislative elections.

MAIN ECONOMIC INDICATORS

USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.7 5.9 5.5 5.0 5.5 6.0Inflation (%) 2.3 2.9 2.4 2.4 2.5 3.4Public sector balance (%GDP) -4.5 -5.1 -3.6 -3.2 -3.9 -7.9Exports 447 603 656 793 1,051 1,283Imports 1,784 2,195 2,478 2,916 3,581 4,063Trade balance -1,336 -1,592 -1,821 -2,123 -2,530 -2,780Current account balance (%GDP) -7.9 -6.0 -8.0 -7.2 -8.6 -7.6Foreign debt (%GDP) 21.8 20.8 21.0 19.8 19.9 19.8Debt service (%Exports) 2.9 2.5 2.6 3.6 3.7 4.5Foreign exchange reserves (in months ofimports)

4.6 5.0 4.3 4.6 4.6 4.2

e = estimate, f = forecast

ARMENIA

11

1

ArmeniaPopulation (million inhabitants): 3.0GDP (US$ million): 6,406

Country @rating: CMedium-term rating: High riskBusiness climate rating: B

RISK ASSESSMENTIn 2007, Armenia again posted two-digitgrowth. Construction remained the maineconomic engine, thanks to major invest-ments in mining, metallurgy and energy aswell as in residential property and officebuildings in the capital Erevan. Transfersfrom Armenians residing abroad spurreddemand. GDP growth, although downslightly from 2007, should remain high in2008.

The dynamism of domestic demand hasundermined external accounts but with for-eign exchange reserves still at comfortablelevels. Although debt ratios have been mod-erate, thanks to prudent fiscal policy, taxrevenues have not sufficed to meet the

country’s infrastructure and educationneeds.

Armenia has successfully carried out aradical transformation to a market economy.Although the legal and institutional environ-ment is relatively satisfactory, corruption isstill a major weakness. The legislative elec-tions in June 2007 and the presidentialelection early this year will not affect Arme-nia’s political and economic overtures to theWest and the country also maintains verygood relations with Moscow. Armenia’s mainweakness has been its geographic and polit-ical isolation, its borders with its two princi-pal neighbours, Turkey and Azerbaijan,being closed. A renewal of hostilities withAzerbaijan over disputed Nagorno-Kara-bakh, moreover, remains a possibility.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 13.9 10.1 14.0 13.3 11.1 10.0Inflation (%) 8.6 2.0 −0.2 5.2 6.0 5.0Public sector balance (%GDP) −1.1 −1.8 −3.0 −2.7 −3.0 −2.9Exports 696 738 1,005 1,019 1,242 1,429Imports 1,130 1,196 1,593 1,921 2,574 3,052Trade balance −434 −458 −588 −902 −1,332 −1,623Current account balance (%GDP) −6.8 −4.5 −3.9 −1.4 −4.0 −4.2Foreign debt (%GDP) 43.4 39.1 33.0 22.4 18.9 15.6Debt service (%Exports) 11.6 6.5 7.2 4.9 9.3 7.9Foreign exchange reserves (in months ofimports)

4.3 4.3 4.0 5.4 5.3 5.2


EUROPE AND THE CIS

12

AustriaPopulation (million inhabitants): 8.3GDP (US$ million): 323,500

Country @rating: A1Business climate rating: A1

RISK ASSESSMENTThe economy continued to grow strongly in2007, driven by exports and investment.Sales to Germany and Eastern Europeancountries were good, while corporate invest-ment in machinery and equipment acceler-ated amid high production capacityutilisation. Household spending, except onhousing, was disappointing,however,despitejob growth.

Economic growth will slow somewhat in2008. Exports will weaken, affected by theslowdown in the German economy and unfa-vourable exchange rates. This trend willremain moderate, thanks to continuingstrong demand from Eastern Europe. Cor-porate investment will develop along similar

lines as will the building sector. Householdconsumption should accelerate, however,spurred especially by the conclusion of rela-tively generous wage agreements and by thecontinuing decline of unemployment.

Over the first nine months of 2007, bank-ruptcies declined 4 per cent after easing 5per cent in 2006. The Coface payment inci-dent index for Austria is at a satisfactorylevel. After two years of favourable economicconditions, the moderate slowdown will beunlikely to undermine corporate financialhealth, which will remain good. The buildingsector (especially electrical installation) andthe home furnishing (production, retail),textiles and, due to increased fuel prices,road transport sectors will continue to pres-ent above average risk.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 1.2 2.3 2.0 3.3 3.2 2.5Consumption (var.) 1.3 1.8 2.0 2.1 1.8 2.2Investment (var.) 7.7 −2.3 1.0 1.5 6.7 3.6Inflation 1.3 2.0 2.1 1.7 1.9 1.9Unemployment 4.3 4.8 5.2 4.7 4.3 4.2Short-term interest 2.3 2.1 2.2 3.1 3.9 4.0Public sector balance (%GDP) −1.6 −1.2 −1.6 −1.4 −0.8 −0.7Public sector debt (%GDP) 64.6 63.8 63.4 62.0 60.0 58.0Exports (var.) 2.3 8.2 6.2 7.5 6.5 4.5Imports (var.) 5.3 6.8 5.2 5.6 5.1 4.8Current account balance (%GDP) 1.4 2.4 3.0 3.4 4.0 3.7


AUSTRIA

13

1

PAYMENT AND COLLECTION PRACTICES

■ PaymentBills of exchange and cheques are neitherwidely used nor recommended, as they arenot always the most effective means ofpayment.To be valid, bills of exchange mustmeet relatively restrictive mandatory crite-ria. This deters business people from usingthem. Cheques need not be backed by fundsat the date of issue but must be covered atthe date of presentation. Banks generallyreturn bad cheques to their issuers, who mayalso stop payment on their own without fearof criminal proceedings for misuse of thisfacility. Bills of exchange and, to a lesserdegree, cheques are more commonly used asa means of financing or payment guarantee.Conversely, SWIFT transfersarewidelyusedfor domestic and international transactionsand offer a cost-effective, rapid and securemeans of payment.

■ Debt collectionAs a rule, the collection process begins withthe debtor being sent a demand for paymentby registered mail, reminding him or her ofhis or her obligation to pay the outstandingsum plus any default interest stipulated inthe sales agreement or terms of sale. Wherethere is no interest rate clause in the agree-ment, the rate of interest applicable semi-annually from 1 August 2002 is the Bank ofAustria’s base rate, calculated by referenceto the European Central Bank’s refinancingrate, marked up by eight percentage points.

For claims that are certain, liquid anduncontested, creditors may seek a fast-trackcourt injunction (Mahnverfahren) from thedistrict court via a pre-printed form. Thecompetent district court for this type of fast-tract procedure expedites the requisiteactionfor ordinary claims up to €30,000 (previously€10,000) based on an amendment to the civilprocedure code Zivilprozessordnung (ZPO)in effect since 1 January 2003.

With this procedure, the judge will issuean injunction to pay the amount claimed plusthe legal costs incurred. If the debtor doesnot appeal the injunction (Einspruch) withintwo weeks of service of the ruling, the orderis enforceable relatively quickly.

A special procedure (Wechselmandantver-fahren) exists for unpaid bills of exchangeunder which the court immediately serves awrit ordering the debtor to settle within twoweeks. Should the debtor contest the claim,however, the case will be tried through thenormal channels of court proceedings.

Similarly, should the judge consider thegrounds for an injunction request to beinsufficient, it will not strictly speaking berejected since this procedure is automaticallyconverted into ordinary proceedings, whichprecludes any other recourse by the claimant.

Where no settlement can be reached, orwhere a claim is contested, the last remainingalternative is to file an ordinary action(Klage) before the district court (Bezirksger-icht) or the regional court (Landesgericht)depending on the claim amount or type ofdispute. A separate commercial court (Han-delsgericht) exists in the district of Viennaalone to hear commercial cases (commercialdisputes, unfair competitionsuits, insolvencypetitions, etc).

During the preliminary stage of proceed-ings the parties must make written submis-sions of evidence and file their respectiveclaims. The court then decides on the facts ofthe case presented to it but does not investi-gate cases on its own initiative. At the mainhearing, the judge examines the evidencesubmitted and hears the parties’ argumentsas well as witnesses’ testimonies. An enforce-ment order can usually be obtained in firstinstance within about 10–12 months. Thecivil procedure code provides that the win-ning party on all points at issue of the lawsuitis entitled to receive full compensation fromthe losing party of all necessary legal feespreviously incurred.

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

0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDAustria

EUROPE AND THE CIS

14

AzerbaijanPopulation (million inhabitants) 8.5GDP (US$ million) 20,122

Country @rating: CMedium-term rating: Moderately high riskBusiness climate rating: C

RISK ASSESSMENTEconomic growth was very strong again in2007, up 30 per cent after 34.5 per cent in2006 and 26.2 per cent in 2005, thanks to asharp increase in volume sales of oil in acontext of high hydrocarbon prices. The rapidincrease in oil export revenues has benefitedthe services sector, mainly telecommunica-tions, transports and construction. GDPgrowth should ease in stages to considerablymore reasonable rates – up 17.4 per cent in2008 and up ‘just’ 10 per cent in 2009 – withoil production expected to reach a threshold,after its threefold increase in the previousfour years.

Oil export revenues fuelled a spectacularimprovement in the country’s financialhealth, exemplified by robust currentaccountsurpluses representing 30 per cent of GDP.Foreign debt, after growing sharply a few

years ago to finance oil facilities,hasreturnedto very moderate levels. Foreign exchangereserves and especially an oil fund nowinsulate the country from any hydrocarbonprice shocks in the near term.

However, the oil export revenues, by fos-tering strong wage growth and robustprivateconsumption, have been responsible for amarked upsurge of inflation: 16 per cent in2007. Of even greater concern, the Azerbai-jani manat appreciation spurred by theinflation and an influx of foreign currencyhas undermined the competitiveness of aprivate manufacturing sector that haspartic-ularly suffered from a poor legal and institu-tional environment. With the country’slimited oil reserves, however, the exportrevenues will not last long. A competitiveprivate sector will thus ultimately be essen-tial to pick up the slack for flagging oil-sectorexport revenues.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 11.2 10.2 26.2 34.5 30.0 17.4Inflation (period-end %) 2.1 6.7 9.6 8.3 16.2 12.9Public sector balance (%GDP) −5.1 −2.6 −2.3 −4.8 −5.2 −4.8Exports 2,625 3,743 7,649 13,015 19,525 25,859Imports 2,723 3,581 4,350 5,269 6,060 6,969Trade balance −98 162 3,299 7,746 13,465 18,890Current account balance (%GDP) −28.3 −30.6 1.4 20.9 30.0 36.7Foreign debt (%GDP) 38.4 40.8 34.7 27.4 25.3 21.4Debt service (%Exports) 6.5 5.5 2.9 2.1 1.8 1.0Foreign exchange reserves (in months ofimports)

1.8 1.8 1.6 2.7 4.1 4.7


BELARUS

15

1

BelarusPopulation (million inhabitants): 9.7GDP (US$ million): 36,945

Country @rating: DMedium-term rating: Very high riskBusiness climate rating: D

RISK ASSESSMENTAfter several years of strong growth largelybased on subsidised prices for energy im-ported from Russia, the short- and medium-term outlook now appears less favourable.Deterioration of the terms of trade, notablyresulting from the raising of the price forRussian gas, will tend to slow wage growth,reduce financing by the public sector andinflate the energy bill for companies andhouseholds with slower economic growth theend result. Offsetting effects on two levels –the rise of oil prices (re-export activity) andthe energy savings made in industry –should, however, somewhat limit theseverityof the slowdown. A better understanding ofsuch trends will be possible once efforts aremade to improve the reliability of statisticaldata.

The current account balance has slippedback into the red since 2006 with Belarushaving to contend with a reduction in itsmarket share in Russia, rising unit labour

costs and appreciation of the real exchangerate compounded by the increase in importedgas prices. In this context, the country’spreviously limited foreign debt has beengrowing rapidly. The still insufficient level offoreign exchange reserves and the continuedhigh levels of short-term debt reflect thecountry’s lack of financial room for manoeu-vre.

The economy is still largely under statecontrol and its productivity very low. Al-though Belarus has been lagging seriouslyon implementing reforms and improving thebusiness environment, it nonetheless boastsgood social indicators. In the political arena,Belarussian President Alexander Lukash-enko seems to have a firm grip on thegovernment with the ongoing centralisationof all levers of power only increasing thecountry’s international isolation. Despite oc-casionally tense economic relations, the gov-ernment should seek to preserve its close tieswith Russia.

EUROPE AND THE CIS

16


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.0 11.4 9.3 9.9 7.8 6.4Inflation (%) 28.4 18.1 10.3 7.0 8.1 10.0Public sector balance (%GDP) −1.7 0.0 −0.7 0.5 0.5 0.5Exports 10,076 13,942 16,109 19,838 21,035 23,572Imports 11,324 16,126 16,610 22,237 25,307 28,388Trade balance −1,247 −2,184 −501 −2,398 −4,272 −4,816Current account balance (%GDP) −2.4 −5.2 1.4 −4.1 −7.9 −8.1Foreign debt (%GDP) 23.7 21.5 17.2 18.6 25.6 31.4Debt service (%Exports) 5.1 3.7 3.3 2.6 3.3 4.9Foreign exchange reserves (in months ofimports)

0.5 0.5 0.9 0.7 0.8 0.9


BELGIUM

17

1

BelgiumPopulation (million inhabitants): 10.6GDP (US$ million): 397,200


STRENGTHS• A privileged position at the heart of the

Western European economic area andthe presence of community institutionsenhance its capacity to host foreigncompanies.

• Foreign trade benefits from quality road,rail and port infrastructure.

• The current account shows a surplusattributable to solid positions inintermediary goods.

• A public sector balance near equilibriumhas facilitated gradual reduction ofpublic sector debt.

WEAKNESSES• By narrowing central authority at the

national level, regionalisation has madeit more difficult to reduce territorialdisparities.

• The limited degree ofinternationalisation of service companieshas not been conducive to eitherinnovation or development of high value-added sectors.

• By undermining job prospects for youth,deficient vocational training has been afactor in continuing high structuralunemployment.

• The fiscal equilibrium rests on isolatedmeasures inadequate in relation to theageing of the population.

RISK ASSESSMENTEconomic growth remained strong in 2007,thanks to firm domestic demand. Job growthand an increase in their incomes promptedhouseholds to continue spending. Corporateinvestment made it possible to maintainproductivity to a very satisfactory level,which partly offset the wage increases. Aslight fiscal budget deficit is attributable tolower-than-expected tax revenues.

The economy will grow more slowly thisyear. The erosion of household and corporateconfidence that began late 2007 will continue,which will affect domestic demand. House-hold spending will come to a standstill,consistent with the moderation of job andincome growth and rising consumer prices.Residential construction will only increaseslightly amid stricter financing conditions,

and the building and public works segmentwill suffer the sluggishness of public invest-ment. The reduced access to credit will beunlikely to hinder corporate investment withcompanies still enjoying substantial cashpositions. It will slow, however, with theeasing of the production capacity constraint.Export performance will be strong despitethe euro appreciation. The still very strongdemand from high-growth countries, Chinaand oil countries in particular, should offsetthe expected slowdown of buying from Euro-pean and American partners. The euro/dollarparity will, however, affect corporate compet-itiveness. In a politically difficult context,there will be little likelihood for adoption offiscal measures to limit public spending,which will, on the contrary, accelerate. The

EUROPE AND THE CIS

18

fiscal budget should thus remain slightly indeficit, despite the easing of debt service.

Bankruptcies increased sharply late lastyear. Corporate profitability and cash posi-tions will nonetheless remain generally sat-isfactory, a situation reflected by the Cofacepayment incident index for Belgium below

the world average. In 2008, several export-intensive sectors will maintain good growthperformance including chemicals, steel, me-chanical engineering and transport facilities.Risks will persist in sectors like construction,textiles/clothing, retailing, car dealers andgarages and hotel/catering.


Percentage 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 1.0 3.0 2.0 2.9 2.6 1.9Consumption (var.) 0.7 1.4 1.3 2.1 2.2 1.9Investment (var.) -0.3 7.1 6.7 4.2 6.7 3.4Inflation 1.5 1.9 2.5 2.3 1.8 2.3Unemployment 8.2 8.4 8.4 8.3 7.7 7.3Short-term interest rate 2.3 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) 0.0 -0.1 0.0 0.2 -0.2 -0.4Public sector debt (%GDP) 98.7 94.2 92.2 88.2 85 82.1Exports (var.) 2.9 6.5 3.6 2.6 5.2 4.3Imports (var.) 2.8 6.5 3.6 2.5 5.9 5.1Current account balance (%GDP) 4.1 3.5 2.4 2.7 2.6 2.9


MAIN ECONOMIC SECTORS

■ TextilesBelgian textile production continued to growin the first four months last year, up 6.5 percent, particularly in spinning and weaving,while it declined in hosiery. Textile invest-ment increased about 24 per cent, making itpossible to stabilise production capacity near79 per cent. Intra-community trading repre-sents 86 per cent of the textile business and95 per cent of the clothing business. Thathighly biased market focus toward the Eur-opean Union could weaken sector companiesin 2008 in view of the expected demandslowdown. That will particularly be the casefor the smaller clothing companies continu-ing to suffer from Asian competition. Cloth-ing investment was thus down 30 per cent inthat segment in 2007.

■ DistributionBelgian distribution (11 per cent of GDP)should slow in 2008 with consumer confi-dence indices pointing to a slowdown end2007 attributable to rising foodstuff prices.The retailer confidence trend is following

suit, with the sector expecting cost increasesacross the board (merchandise purchasing,transport, personnel and so on). All segmentsshould nonetheless continue to grow – food,clothing, gifts and toys, do-it-yourself andluxury products – except home appliancesand telephony.

■ ConstructionIn 2007, residential construction, infrastruc-ture works and public works experiencedslowdowns that should continue in2008amidsteadily increasing material prices, risingmortgage rates and the decline in publicsector investment. The trend will, however,result in a soft landing. Favourable trends inseveral industry segments, like renovation,offset last year’s decline in building permitsfor new housing construction.

■ ChemicalsHighly export-intensive with sales abroadrepresenting about 80 per cent of production,the sector should suffer from the worlddemand slowdown especiallywithproductioncosts in the branch higher than those of itsEuropean neighbours and thus reducing its

BELGIUM

19

1

competitiveness. Companies dealing in basicchemicals, positioned on high value-addedproducts, will continue to fendoff competitionfrom emerging countries. This will not be thecase for the smaller companies that are inthe majority in the plastic materials andrubber sector. With those companies alreadyfeeling the effects of competition from emerg-ing countries, rising raw material prices andthe gloomy economic conditions in clientsectors, especially the automotive industry,could weaken them. At this juncture, how-ever, their profitability is still satisfactory.


■ PaymentThe bill of exchange is a common means ofpayment in Belgium. In the event of default,a protest may be drawn up through a bailiffwithin two days of the due date whereby thebearer can also initiate proceedings againstthe bill’s endorsers.

The National Bank of Belgium publishes alist of protests that can be consulted by thepublic at the office of the clerk of thecommercial court and in some business andfinancial newspapers (Journal des protets,Echo de la Bourse). Such publication is aneffective means of pressuring debtors tosettle disputes because of the possibility thatthey might be refused credit by banks andsuppliers.

Cheques are commonly used but to a lesserextent than bills of exchange. Issuing uncov-ered cheques is a criminal offence. TheBelgian public prosecutor’s office is fre-quently willing to press criminal charges forclaims over €5,000. Uncovered cheques (likeprotested drafts) are equivalent to an ac-knowledgement of debt and, when needed,can be used to obtain an attachment order.

Although bank transfers are the fastestmeans of payment (all major Belgian banksuse the SWIFT system), they do not offer afoolproof guarantee of payment as the trans-action is very much dependent on the buyer’sgood faith. They should, therefore, be usedwhere background financial information onthe buyer is available to the seller.

■ Debt collectionOut-of-court settlement begins with formalnotice sent to the debtor by recorded-delivery

letter or served by bailiff, requesting that thedebtor pay within 15 days the outstandingprincipal, plus past-due interest or applica-tion of a penalty clause (clause penale)stipulated in the terms and conditions ofsale.

In the absence of a prior contractualagreement, interest on an unpaid invoice isautomatically applicable from the day follow-ing the due date at a six-monthly rate set bythe Ministry of Finance based on the Euro-pean Central Bank’s refinancing rate plusseven percentage points (the Act on ’comba-ting late payment in commercial transac-tions’ in force since 7 August 2002).

Summary procedures resulting in an in-junction to pay for claims under €1,860 fallwithin the sole jurisdiction of a justice of thepeace. They must be supported by a docu-ment drawn up by the debtor pointing to theundisputed nature of the claim. But owing totheir excessive formalism and the need for alawyer’s signature, summary proceedingsare little used.

Such action must moreover be preceded byan injunction to pay served by bailiff or sentby recorded-delivery letter with acknowl-edgement of receipt. And the injunction mustinclude the text of the articles of the CodeJudiciaire relevant to the injunction proce-dure.

If a debtor refuses to settle amicably orfails to respond to a formal demand, thecreditor can then initiate ordinary proceed-ings against that debtor and summon him toappear before the court of first instance or,for overdue commercial payments, the com-petent commercial court. For undisputedclaims, rulings are usually delivered eitherimmediately from the bench (sur les bancs)or within a month of the final hearing.

Proceedings can take longer for disputedclaims sometimes up to two years (especiallyin the event of an appeal). However, underthe Belgian code of civil procedure the judgemay set a deadline for the submission ofarguments and evidence at the request of theparties. Since 1 January 2008, the law on the’recoverability of attorney fees’ allows thejudge to fix a procedural indemnity deter-mined on a progressive scale according to theamount in default.

EUROPE AND THE CIS

20

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 January1998 – moreover recognise retention of prop-erty rights in specific cases and circum-stances. For instance, an action for recoveryis only admissible if initiated before theregistered list of admitted debts is drawn up(proces-verbal de verification de creances).

Another safeguard benefiting creditors isthe right granted to sellers of moveableproperty stipulated under article 20-5 of the

16 December 1851 mortgage law. This rightconcerns all durable goods employed directlyin an industrial, commercial, or craft activityand generally considered as ’real estate’ byincorporation or economic destination. Acreditor may act on this right during a five-year period, a debtor’s bankruptcy notwith-standing, provided he or she has registeredcertified true copies of invoices with theclerk’s office of the commercial court in thedebtor’s district of residence, within 15 daysof delivery of the goods.


0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDBelgium

BOSNIA AND HERZEGOVINA

21

1

Bosnia andHerzegovinaPopulation (million inhabitants): 3.9GDP (US$ million): 11,296

Country @rating: DMedium-term rating: Very high riskBusiness climate rating: C

RISK ASSESSMENTEconomic growth remained strong in 2007amid a favourable external environmentcoupled with strong consumption driven byrising 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 theeffects of the VAT introduction the previousyear petered out. The fixed nature of theexchange rate should facilitate limiting infla-tionary pressures in 2008, rising energy andfood prices notwithstanding.

The country nonetheless still suffers frommany weaknesses including a bloated andinefficient public sector, an over-regulatedbusiness environment and a segmented la-bour market reflecting to some extent theinstitutionally and ethnically fragmentedcontext in the country. Efforts will have to bemade to improve policy coordination betweenentities and create a unified economic space.Bank oversight and fiscal prudence need tobe strengthened. Exports still lack diversifi-cation – with metals, mineral products and

wood representing nearly half of sales abroad– and are still vulnerable to price trends forcommodities. The country continues to runhigh current account deficits albeit limitedby expatriate worker remittances.

In the political arena, the crisis the countryhas been contending with, resulting from thedeterioration of relations between BosnianSerb leaders and the High Representative ofthe International Community, seems to haveabated. The Action Plan proposed by theHigh Representative, which includes a re-form of the police, had raised protests andled the Bosnian government’s Serbian primeminister to resign in November 2007. Parlia-ment finally adopted the Action Plan in earlyDecember 2007. This has permitted the EUto sign a stabilisation and association agree-ment, the first step towards membership.However, these events have given rise to amounting nationalist rhetoric in the SerbianRepublic (one of the two entities comprisingthe country, with the Croatian-Muslim Fed-eration). Tensions could resurface shouldKosovo become independent.

EUROPE AND THE CIS

22


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.5 6.1 5.0 6.2 5.5 6.0Inflation (%) 0.6 0.4 3.7 7.4 1.4 2.1Public sector balance (%GDP)* −8.1 −3.8 −2.2 0.4 −3.9 −4.3Exports 1,478 2,087 2,590 3,382 4,058 4,600Imports 5,637 6,656 7,545 7,680 9,753 10,700Trade balance −4,159 −4,570 −4,955 −4,298 −5,695 −6,100Current account balance (%GDP) −19.5 −17.9 −19.7 −10.8 −15.5 −15.0Foreign debt (%GDP) 55.5 52.1 49.9 49.4 49.2 45.6Debt service (%Exports) 6.1 7.4 4.1 5.0 5.0 5.2Foreign exchange reserves (in months ofimports)

3.5 4.0 3.7 4.8 5.1 5.8

*ex grants, e = estimate, f = forecast

BULGARIA

23

1

BulgariaPopulation (million inhabitants): 7.7GDP (US$ million): 31,483

Country @rating: A4Medium-term rating: Quite low riskBusiness climate rating: A4

STRENGTHS• Accession to the EU has been a

stimulatory factor and triggered a catch-up dynamic in the country.

• Prudent fiscal policy and active debtmanagement have resulted in aconsiderable reduction in sovereigndefault risk.

• The banking sector has beenconsolidated.

• The country benefits from a skilledlabour force.

• Buoyant investment and increasedcapital goods imports augur well forgrowth in the future.

WEAKNESSES• The current level of external financing

needs will be difficult to sustain in themedium term.

• Foreign debt has grown considerablyunder the effect of rising private debt.

• Maintaining a steady inflow of foreigncapital will require implementation ofnew reforms and improvements in thebusiness environment.

• Dissension within the centrist coalitionin power has delayed reformimplementation.

RISK ASSESSMENTEconomic growth remained strong in 2007,driven mainly by domestic demand with FDIand the expansion of credit spurring invest-ment. Job and wage growth fuelled privateconsumption. Continued strong importgrowth, however, particularly of capitalgoods, led to a further widening of the tradedeficit. Corporate payment behaviour hasremained generally satisfactory with somesectors, like agriculture and construction,presenting above average risk.

The strong growth should continue in2008.Investment should continue to grow at asatisfactory rate due notably to fund trans-fers from the EU. Private consumptionshould remain buoyant. There should belittle easing of inflation, however, due to thestrong domestic demand and wage pressure,

which could keep the country from joiningthe euro zone before 2012.

Fiscal policy has remained prudent but theextent of the current account deficit has ledto an increase in private foreign debt andgreater dependence on foreign capital. Thisdeficit seems difficult to sustain in view ofthe country’s rigid exchange rate system(currency board) with FDI expected to slowfrom 2008. This situation may ultimatelyonly unwind at the price of a sharp growthslowdown.

The risk of governmental instability willnot jeopardise the major economic policyoptions. The possibility of early electionsbeing held before the June 2009 scheduleddate would not, however, facilitate imple-mentation of new reforms, notably thoseconcerning the business environment.

EUROPE AND THE CIS

24


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.0 6.6 6.2 6.1 6.3 6.2Inflation (%) 2.3 6.1 5.0 7.3 7.8 6.2Public sector balance (%GDP) 0.0 2.3 2.0 3.2 3.0 3.1Unemployment (%) 14.3 12.7 11.5 9.6 8.0 7.1Exports 7,081 9,931 1,1754 15,064 19,709 24,700Imports 9657 13,619 1,7204 21,874 28,779 34,600Trade balance −2,576 −3,688 −5,450 −6,810 −9,070 −9,900Current account balance −1,022 −1,671 −3,244 −5,011 −7,270 −7,740Current account balance (%GDP) −5.1 −6.8 −11.9 −15.9 −18.4 −17.0Foreign debt (%GDP) 67.2 70.0 65.5 84.1 85.6 81.5Debt service (%Exports) 12.5 19.8 38.4 23.9 27.4 22.5Foreign exchange reserves (in months ofimports)

5.8 5.8 4.4 4.8 4.3 3.8


CONDITIONS OF ACCESS TO THE MARKET

■ Market overviewA country with some 7.7 million inhabitantsand a standard of living that – while belowthe 25-member EU average – is steadilyrising, Bulgaria has seen its per capita GDPjump from €1,919 in 2001 to €3,250 in 2007.However, income disparity (the averagemonthly wage is €200) is a source of frustra-tion, exacerbated by EU accession on 1January 2007 and the inevitable compari-sons that this brings.

■ Means of entryBulgaria is a market economy. The bankingsector is largely dominated by foreign banks,and power supply and telecommunicationshave been privatised. The privatisation pro-gramme is nearing completion with the saleof the Bulgarian state-owned shipping com-pany. Following EU accession in early 2007(at the same time as Romania), customsduties on almost all EU products have been

abolished. With regard to intellectual andindustrial property protection, on 28 Novem-ber 2003 a bilateral agreement was signedbetween the French industrial propertyagency, Institut National de la ProprieteIntellectuelle (INPI), and the Bulgarian Pat-ents Office. In practice, there is a fairlylimited supply of counterfeit consumer goodsin the country.

■ Attitude towards foreign investorsThe country is extremely open to foreigninvestment. FDI, which has climbed sharplysince 1996, totalled US$20.2 billion at end-March 2007. At US$5.172 billion, estimatedforeign investment inflows reached recordlevels in 2006, up 34 per cent against theprevious year. The government hopes toattract foreign investors through a highlycompetitive tax policy (10 per cent corpora-tion tax and income tax planned for 2008).However, new foreign investors may encoun-ter problems in their dealings with localofficials.

BULGARIA

25

1

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS)

Private consumption 40Public consumption 11Investment 16

Mn USDMn USD

MAIN DESTINATIONS OF EXPORTS MAIN ORIGINS OF IMPORTS

Turkey GreeceGermanyItaly Belgium GermanyRussia Italy ChinaTurkey

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%

■ 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%

IMPORTS by products

0

500

1000

1500

2000

0500

1000150020002500300035004000

Exports: 61% of GDP Imports: 77% of GDP

STANDARD OF LIVING / PURCHASING POWER

Indicators Bulgaria Regional averageEmergingcountry average

GNP per capita (PPP dollars) 10,140 11,613 5,983GNP per capita (USD) 3,990 6,859 2,313Human Development Index 0.816 0.772 0.672Wealthiest 10% share of national income 24 28 31Urban population percentage 70 62 44Percentage under 15 years old 14 20 30Number of computers per 1,000 inhabitants 59 122 50

EUROPE AND THE CIS

26

CroatiaPopulation (million inhabitants): 4.4GDP (US$ million): 42,653

Country @rating: A4Medium-term rating: Moderately high riskBusiness climate rating: A3

STRENGTHS• The EU integration process has

enhanced Croatia’s economic prospectswith the country already benefiting fromstrong, essentially non-inflationarygrowth.

• Croatia boasts a higher level ofdevelopment than most Balkan countriesand an already advanced degree ofeconomic convergence with Europe.

• The country continues to makesubstantial efforts on investment,infrastructure has been improved andthere is great tourist potential (currentlyrepresenting 20 per cent of GDP).

• Better management of public sectorfinances along with privatisations havefacilitated stabilising the extent ofgovernment.

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 willbear watching.

• With the restructuring of the publicsector lagging, it continues to play alarge role in the economy and red tapecontinues to undermine the businessclimate.

• The pace of negotiations with the EUcontinues to depend on implementationof politically difficult reforms.

RISK ASSESSMENTEconomic growth accelerated in 2007, drivenby consumption and investment. Productiv-ity gains and a buoyant job market contrib-uted to this. Industrial activity remainedrobust. Despite rising food prices and energycosts, inflation continued to ease with thecentral bank maintaining its exchange ratestabilisation policy.

In 2008, domestic demand should remaindynamic, even with a decline in social allow-ances (non-renewal of exceptional paymentslinked to pensions) and a slight slowdown inthe expansion of credit. Exports should con-tinue to gain momentum, benefiting from theimprovement in productivity.

Despite the growth of sales abroad andtourism revenues, however, external deficitswill remain large with imports continuing togrow rapidly, fuelled by domestic consump-tion and the high import content of exportsand investments. To enhance its growthpotential and counter the vulnerabilitiesresulting from its large current accountdeficit and high foreign debt, the country willhave to continue the consolidation work onpublic sector finances and intensify the ef-forts on reform.

The accession negotiations with the EUhave continued, with talks opened thus faron 14 of the 33 chapters of the acquiscommunautaire and provisionally closed on

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27

1

two chapters. While refusing to consider adate of admission to the Union at thisjuncture, Brussels has focused attention onthe persistence of major shortcomings inseveral areas including the judicial system,public administration, anti-corruption meas-ures and shipyard restructuring. Prime Min-

ister Ivo Sanader’s conservative CroatianDemocratic Union (Hrvatska DemokratskaZajednica, HDZ) party, which won the legis-lative elections in November 2007, should beable to put together a new majority andhopes to lead the country into the Union by2010.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.3 4.3 4.3 4.8 5.7 5.4Inflation (%) 1.8 2.1 3.3 3.2 2.3 2.5Public sector balance (%GDP) −6.2 −4.9 −4.1 −3.0 −2.7 −2.7Unemployment (%) 19.5 18.7 18.0 17.2 16.6 16.0Exports 6,308 8,210 8,955 10,606 12,110 14,322Imports 14,216 16,560 18,301 21,117 25,787 29,641Trade balance −7,908 −8,350 −9,346 −10,511 −13,677 −15,319Current account balance −2,132 −1,841 −2,576 −3,175 −3,838 −4,408Current account balance (%GDP) −7.2 −5.1 −6.6 −7.3 −7.5 −7.5Foreign debt (%GDP) 84.6 86.9 77.4 88.6 87.0 85.4Debt service (%Exports) 17.8 19.3 21.7 23.2 22.4 23.0Foreign exchange reserves(in months of imports)

5.2 4.8 4.4 5.1 4.8 4.4



■ Market overviewIn a country of 4.44 million inhabitants,the working population is 1.7 million. Theofficial unemployment rate in August 2007was 13.8 per cent (CROSTAT). The netwage in July 2007 was HRK 4,855 (about€663), up 4.4 per cent over the same periodin 2006. The central bank forecasts around3.5 per cent inflation due to the impact ofrising cereal and energy prices in the sec-ond half of the year. Imports do not nor-mally require prior approval, except forproducts regulated by international agree-ments (firearms, gold, works of art, etc) oron ground of public health (foodstuffs, etc).Accession talks with the EU began on 4October 2005. The screening period for Cro-atian laws, some of which are already inline with EU integration criteria, expiredon 18 October 2006. The Croatian govern-ment aims to join the EU in 2009. Customsduties have been reduced under WTOagreements and the stabilisation and as-

sociation agreement signed with the EU.Most industrial goods are duty-exempt. Themaximum tariff is 5 per cent, although theaverage applied rate is around 2.9 per cent.Duty on foodstuffs under WTO arrange-ments varies between 2 per cent and 45per cent, while preferential rates apply tonon-quota items in line with EU rules.Croatian agriculture is, on the whole, quiteuncompetitive. The EU’s screening reporthas highlighted the existence of govern-ment subsidies incompatible with CommonAgricultural Policy (CAP) mechanisms. Allmeans of payment are available in Croatia.For consumer purchases, credit cards aremore widely used than cheques, which arenot common. It is often possible to obtaina 10 per cent discount on cash payments.Utility services delivered to the home areusually settled by money order or e-bank-ing. For commercial settlements, the mostwidely used instruments are bank trans-fers, bank guarantees confirmed by a for-eign bank and cheques drawn on awell-known local bank.

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■ Attitude towards foreign investorsThe principle of national treatment is ex-tended to foreign investors who, like localinvestors, have to deal with a slow andcumbersome bureaucracy, which isgraduallyimproving (Doing Business 2008 Report).Thereal estate register is being updated and isalready available on the Internet, with theland register due to follow suit. The judicialsystem for commercial disputes is cloggedwith a backlog of 1 million cases. However,reforms are under way in the form of newlabour, bankruptcy and competition legisla-tion. Between 1993 and 2007 (Q2), FDItotalled €16.1 billion, including €2.1 billionin the first half of 2007. In the 15-year period

under review, the four leading investors areAustria (26.2 per cent), the Netherlands (16.8per cent), Germany (14.6 per cent) andFrance (7.8 per cent).

■ Foreign exchange regulationsThe national currency, the kuna, is notconvertible outside the country. Foreigncom-panies must open a foreign currency accountas well as a kuna account to do business inCroatia. The central bank (HNB)hasadopteda slightly overvalued floating exchange ratefor the kuna, which it regulates by interven-ing on the currency market. The exchangerate in August 2007 was 7.31 kunas to theeuro.

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1

OPPORTUNITY SCOPE

BREAKDOWN IN DOMESTIC DEMAND (%GDP + IMPORTS)


Mn USDMn USD


Italy GermanyBosnia Slovenia Austria GermanyItaly Russia SloveniaAustria

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%

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

IMPORTS by products

0500

1000150020002500300035004000

0

500

1000

1500

2000

2500



Indicators Croatia Regional averageEmergingcountry average


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CyprusPopulation (inhabitants): 765,483GDP (US$ million): 18,235

Country @rating: A2Medium-term rating: Low riskBusiness climate rating: A2

RISK ASSESSMENTEconomic growth remained relatively strongin 2007 due notably to the expansion ofcredit, which spurred retail sales, car pur-chases and construction activity, and therebyoffset the poor performance in tourism.Growth could slow slightly in 2008 amid adecline in car purchases, slower expansion ofcredit and a new slowdown of demand fromthe euro zone and from the United Kingdom,its number-one customer.

With inflation under control, a publicdeficit in decline and a stable exchange rate,Cyprus has received approval to adopt theeuro in January 2008.

The fiscal consolidation process will none-theless have to continue to reduce publicsector debt that still exceeds the 60 per centof GDP threshold. The rise of energy costs,the strength of domestic demand and lossesof competitiveness have, moreover, contrib-uted to the widening of the current account

deficit. Foreign debt has reached high levelsin this context, notably with a sharp increasein the debt of banks. Adoption of the single-currency will, however, allows Cyprus toreduce the exchange rate risk associatedwith that debt.

Since the rejection of the reunificationplanthat the United Nations proposed for theIsland in 2004, progress on that issue hasbeen at a standstill. With the situationcomplicating the EU’s foreign relations, in-ternational pressure could intensify in favourof a renewal of talks. EU accession negotia-tions with Turkey will be subject to partialsuspension until Ankara opens its ports andairports to Greek Cypriots. The Party forJustice and Development’s (AKP’s) largeelection victory in Turkey in July 2007should, however, improve its European pros-pects. That could in turn prompt Turkey todemand a reopening of discussions on theCyprus issue.

CYPRUS

31

1


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.8 4.2 3.9 3.8 3.7 3.4Inflation (%) 4.1 2.3 2.6 2.5 2.3 3.9Public sector balance (%GDP) −6.3 −4.1 −2.3 −1.5 −1.0 −1.4Exports 925 1,174 1,545 1,417 1,496 1,596Imports 4,108 5,222 5,776 6,440 6,828 6,912Trade balance −3,183 −4,049 −4,231 −5,023 −5,332 −5,316Current account balance (%GDP) −2.2 −5.2 −5.5 −5.9 −6.0 −5.1Foreign debt (%GDP) 57.3 82.0 88.3 121.4 127.6 120.6Debt service (%Exports) 6.8 12.1 13.8 15.5 18.2 18.5Foreign exchange reserves (in months ofimports)

5.1 4.9 4.7 5.6 5.7 5.6


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Czech RepublicPopulation (million inhabitants): 10.2GDP (US$ million): 141,801

Country @rating: A2Medium-term rating: Very low riskBusiness climate rating: 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 – particularlyon economic trends in the Europe of theFifteen.

• Deterioration of public sector accountshas delayed the country’s integrationinto the euro zone.

• Repatriation of investment income hasundermined the current account.

• The coalition government’s weaknessdoes not augur well for far-reachingpublic finance reform.

RISK ASSESSMENTEconomic growth remained relatively strongin 2007. Consumption benefited from in-creases in real wages and social benefits andthe easing of unemployment, partly compen-sating for a slight investment slowdown.Export-oriented sectors (the automotive in-dustry, electric and electronic equipmentandmachinery) continued to be the most dy-namic. Conversely, food and textiles are stillmired in difficulty. The Coface paymentincident index is back in line with the worldaverage. Growth should slow from 2008 withprivate consumption undermined by a slowerexpansion of credit and tighter fiscal policy.Investment should be stronger however,thanks to increases in European funding anda steady influx of foreign investment, notablyin the automotive industry. The currentaccount deficit, sustained especially by in-vestment-income payments abroad, shouldease amid a continuing trade surplus. FDI

should moreover continue to cover a signifi-cant proportion of the country’s externalfinancing needs.

Increases in indirect taxes and regulatedprices should however stoke inflation in2008. The public sector finance situation isfurthermore still shaky. The fiscal deficitwidened again in 2007 as a result of a sharpincrease in social spending. The govern-ment’s stabilisation programme should re-sult in a reduction in that imbalance from2008. It appears uncertain however whetherthe government will be capable of durablyreducing public spending in the absence ofmajor reforms in the areas of health andpensions. In this context, adoption of theeuro seems likely to be postponed beyond2012.

The June 2006 elections resulted in aparliament with no majority with the po-litical gridlock not untangled until January2007 when centre-right coalition won a

CZECH REPUBLIC

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1

vote of confidence, thanks to the absten-tion of two former social democratic dep-uties. This precarious situation

compounded by discord within the coalitionwill not facilitate implementation of a fis-cal overhaul.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.6 4.6 6.5 6.4 5.7 4.6Inflation (%) 0.1 2.8 1.8 2.5 2.7 4.9Public sector balance (%GDP) -6.6 -3.0 -3.5 -2.9 -3.8 -3.2Unemployment (%) 10.3 9.5 8.9 7.7 5.6 5.7Exports 48.7 67.2 78.0 95.1 116.6 135.5Imports 51.2 67.7 75.4 92.1 112.7 132.3Trade balance -2.5 -0.5 2.5 3.0 3.9 3.2Current account balance -5.8 -5.7 -1.9 -4.6 -6.3 -6.9Current account balance (%GDP) -6.3 -5.2 -1.6 -3.2 -3.8 -3.7Foreign debt (%GDP) 38.2 41.3 37.2 40.9 39.4 37.9Debt service (%Exports) 6.9 6.7 6.4 5.5 5.1 4.1Foreign exchange reserves (in months of imports) 4.9 3.9 3.6 3.2 2.7 2.4



■ Means of entrySince the Czech Republic’s accession to theEU on 1 May 2004, there are no tariff or non-tariff barriers to products imported from theEU. The country has made a tremendouseffort to meet EU integration criteria andattract foreign investment. Tax reforms,which come into effect on 1 January 2008,provide for the establishment of a single rateof income tax (15 per cent then 12.5 per cent)and corporation tax (phased reduction from24 per cent to 19 per cent in 2010). Itslegislation complies with Community stan-dards in such matters as harmonisation ofbusiness legislation and regulations – espe-cially as regards public procurement (adop-tion of European Directive No. 2004/18/EC)– competition rules and labour law (adoptionof a new Labour Code that provides forsimpler and more flexible labour relationsand adjustable non-wage contracts).

■ Attitude towards foreign investorsThe investment promotion agency, Czechin-vest, runs several schemes. There are twotypes of tax incentive. New companies formedin connection with an investment project

may demand exemption from corporation taxfor a period of five years. For investments inplant modernisation or capacity expansionat a Czech company, firms may ask forpartial exemption from corporation tax.These exemptions lapse the moment a firmbreaches the official grant ceiling.

To be eligible, firms must invest a mini-mum of CZK100 million over three years.This threshold is reduced to CZK60 millionor CZK50 million if their activity is based ina ‘high-unemployment’ region. Half the min-imum investment must be made up of theinvestor’s own funds. Expenditure on indus-trial equipment must account for at least 60per cent of overall investment. Moreover,investors must maintain their investmentand keep the jobs created for at least fiveyears. This scheme also offers discounts onbuilding land and infrastructure acquiredthrough the state or the municipalities. Italso offers job creation, training and regrad-ing grants based on the region’s unemploy-ment rate.

Companies investing in so-called ‘strategic’services (call centres, shared services cen-tres, software development, information andcommunications technology, high-tech

EUROPE AND THE CIS

34

equipment repair) are eligible for govern-ment business and training grants, providedthey invest a minimum of CZK10 million (€1million) over three years and create a mini-mum number of jobs, which varies accordingto region.

Job-creation grants are also available inhigh-unemployment regions, even if a firm isnot yet operational there. The minimuminvestment required is CZK10 million, 50per cent of which must be self-financed, for atwo-year period. At least ten jobs must becreated by the end of this period and thecompany must maintain its activity for atleast three years.

In addition, European funding is availableto the tune of €26.7 billion over the period2007–2013 for operational schemes such as‘Business and Innovation’ and ‘Training forCompetitiveness’ if they invest in and con-tribute to the establishment of foreign com-panies in the Czech Republic.

■ Foreign exchange regulationsThe Czech koruna is fully convertible. Thecurrency’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 bybank transfer in euros or Czech korunas. Thebulk of payments between companies doingbusiness together on a regular basis is madeby SWIFT and passes off smoothly. However,for initial business transactions or largeorders, it is advisable to use documentarycredit opened with a major Czech bank orthe local branch of a French bank.


■ PaymentBills of exchange and cheques are not widelyused, as they must be issued in accordancewith certain criteria to be valid. For unpaidand protested bills of exchange (smenka cizı),promissory notes (smenka vlastnı) andcheques, creditors may access a fast-trackprocedure for ordering payment underwhich,if the judge admits the plaintiff’s application,the debtor has only three days to contest theorder against him or her.

Bank transfers are by far the most widelyused means of payment. Leading Czech

banks – after successive phases of privatisa-tion and concentration – are now linked tothe SWIFT system, which provides an easier,quicker and cheaper method for handlingdomestic and international payments.

Inspired by EU regulations, a recent pay-ment systems law, in force since 1 January2003, sets the rules for transferring funds inthe enlarged European area and empowersthe Czech National Bank (Ceska NarodniBanka) to oversee local use of electronicpayment instruments.

■ Debt collectionIt is advisable, as far as possible, not toinitiate recovery proceedings locally becauseof the country’s cumbersome legal system,the high cost of legal action and lengthy courtprocedures – it takes almost three years toobtain a writ of execution due to a lack ofjudges properly trained in the rules of themarket economy and proper equipment.

Service of final demand for payment sup-ported by proof of debt reminds the debtor ofhis payment obligations, increased by past-due interest payable from the day after thepayment date stipulated in the commercialcontract.

Since 28 April 2005, the applicable rate,unless agreed otherwise by the parties, is the’repo’ rate applied by the Czech NationalBank, in force on the first day of the referencehalf-year; increased by seven percentagepoints.

Should the debtor lack the funds neededfor immediate payment, it is advisable toseek an out-of-court settlement based on aschedule of payment, preferably drawn up bya public notary, accompanied by an enforce-ment clause that allows them, in case ofdefault by the debtor, to go directly to theenforcement stage, after the court admits thebinding nature of that document.

Where creditors have significant proof ofclaim (unpaid bills of exchange or cheques,acknowledgement of debt, etc), they mayobtain an injunction to pay (platebnı rozkaz)under a fast-track procedure, which maynonetheless take from three months to a yeardepending on the workload of the courts, butwhich does not necessitate a hearing as longas the claim is sufficiently well founded. The

CZECH REPUBLIC

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1

advance on court fees, at the claimant’sexpense, amounts to 4 per cent of the totalclaim.

Where a debtor contests an injunctionwithin 15 days of its service, an ordinaryprocedure will then apply with the partiessubsequently summoned to one or morehearings to be heard and produce evidence.The judge will then decide whether to throwout the plaintiff’s application or order thedebtor to pay principal and costs.

Ordinary proceedings are partly in writingwith the parties filing submissions accompa-nied by all supporting case documents (orig-inal or certified copies) and partly oral withthe litigants and their witnesses heard onthe main hearing date.

Any settlement reached between the par-ties during these proceedings and ratified bythe court is tantamount to a writ of execution,

in case of subsequent non-compliance withthe agreement obtained.

The laws governing commercial compa-nies, commercial papers (bills of exchange,cheques, promissory notes, etc), unfair com-petition and bankruptcy, for example, fallunder the jurisdiction of regional courts(krajsky soud) or the Prague regional courtknown as the municipal court (mestsky soud).

To speed up execution of the excessivenumber of pending judgements moreover, anew body of bailiffs (soudnı exekutor), estab-lished since May 2001 and invested withbroad investigative powers to identify andlocate a debtor’s assets before proceedingwith actual execution of the court order, isgradually eliminating processing delays. Forthat bailiff category, a different fee scheduleapplies, based on the amount concerned bythe execution.


0

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350

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4

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5

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6

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6

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7

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7

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8

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8

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9

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9

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0

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WORLDCzech Republic

EUROPE AND THE CIS

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OPPORTUNITY SCOPE



Mn USDMn USD


Germany PolandSlovakia France Austria NetherlandsGermany Slovakia RussiaPoland

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%

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

IMPORTS by products

0

5000

10000

15000

20000

25000

30000

35000

0

5000

10000

15000

20000

25000

30000



Indicators Czech Republic Regional averageEmergingcountry average


DENMARK

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1

DenmarkPopulation (million inhabitants): 5.4GDP (US$ million): 276,200


RISK ASSESSMENTGrowth ran out of steam in 2007. Householdscut back on spending under the twofold effectof the property market correction and risinginterest rates. Wage growth spurred byrecord employment nonetheless had a miti-gating effect on that slowdown. Meanwhile,companies suffered from erosion of theirproductivity and a sharp export downturn.

The economic activity will continue to slowdown in 2008. Households will not increasetheir spending despite the expected growthof their disposable income. Property priceswill stabilize at a good level, thereby facili-tating a soft landing in residential activity.Companies will continue to contend witherosion of their competitiveness amid contin-uing tight conditions in the labour marketcompounded by difficulties in recruitingskilled workers. Although still underpinnedby sales of oil and natural gas, export growthwill be hampered by the limited availabilityof production capacity for companies and theeconomic slowdowns affecting traditional

trading partners. Concurrently, less robustdomestic demand will affect imports, whichwill tend to limit the decline of the currentaccount surplus. The fiscal budget will showa surplus again this year, bolstered byrevenues linked to prices for North Sea oil.Public spending could be higher than ex-pected, however, due to commitments madeduring the general elections in autumn 2007.The government will continue in any case toreduce public sector debt.

In this context of relatively sluggishgrowth, costs in labour-intensive sectorsshould be under pressure. Sectors relying ondomestic demand should suffer from theslowdown of household consumption andcorporate investment. Corporate bankrupt-cies thus accelerated in the first 10 monthsof 2007, rising 20 per cent, particularly inindustry, construction, distribution, the ho-tel-catering sector, information technologyand paper/printing. The Coface paymentincident index is nonetheless still below theworld average and payment behaviourshould remain generally satisfactory in2008.

EUROPE AND THE CIS

38


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 0.7 1.9 3.0 3.5 1.9 1.6Consumption (var.) 1.6 3.4 3.8 3.1 2.1 1.7Investment (var.) 0.2 1.3 8.4 13.0 5.1 2.5Inflation 2.1 1.2 1.8 1.9 1.6 2Unemployment 5.3 5.5 5.7 4.5 3.5 3.3Short-term interest 2.4 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) -0.1 1.7 3.9 4.6 3.7 3.1Public sector debt (%GDP) 44.4 42.6 35.9 30.1 24.6 20.1Exports (var.) -1.2 2.7 8.0 10.1 3.9 3.9Imports (var.) -1.7 6.4 10.9 14.4 5.3 4.8Current account balance (%GDP) 3.2 2.3 2.9 2.4 1.3 1.1



■ PaymentLike the cheque, the bill of exchange is notfrequently used in Denmark. Both are anembodiment and, therefore, an acknowledge-ment of debt. Accepted but remaining unpaidbills and cheques are legally enforceableinstruments that exempt creditors from ob-taining a court judgement. In such cases, the’judge-bailiff’ (Fogedret) is appointed to over-see enforcing attachment. First, however,the debtor is summonsed to declare his orher financial situation for the purposes ofdetermining his or her ability to repay thedebt. It is a criminal offence to make a falsestatement of insolvency.

Bank transfers are the most commonlyused means of payment. All major Danishbanks use the SWIFT network – a rapid andefficient payment of domestic and interna-tional transactions.

■ Debt collectionOut-of-court collection begins with the credi-tor or his or her legal counsel sending debtora final demand for payment by registered orordinary mail in which the latter is given 10days to settle the principal amount, plus anyinterest penalties provided for in the agree-ment.

Where there is no such clause agreed bythe parties, the rate of interest applicable tocommercial agreements contracted after 1August 2002 is the Danish National Bank’s

benchmark or lending rate (udlansrente) inforce on 1 January or 1 July of the year inquestion, plus seven percentage points.

It should also be noted that, where the duedate for payment is not complied with, anysettlement or acknowledgement of debt ne-gotiated at this stage of the recovery processis directly enforceable, on condition that anenforcement clause is duly included in thenew settlement or agreement.

For claims that are not settled out of court,creditors usually engage a lawyer to defendtheir interests, even though Danish lawallows plaintiffs and defendants direct rep-resentation in court. Unlike other countries,Denmark has only one type of legal profes-sional: lawyers (ie there are no notaries,barristers, bailiffs-at-law, etc).

Where debtors fail to respond to a demandfor payment or where the dispute is notserious, creditors may obtain, usually afterthree months of proceedings, a judgementfollowing an adversarial hearing or a judge-ment by default ordering the debtor to pay,within 14 days, the principal amount plusinterest and expenses, which include courtfees and, where applicable, a contribution tothe creditor’s legal costs. The legal systemreform effective since 1 January 2007 isintended to speed up procedures and providecitizens with a more homogeneous and betterquality service.

All cases, whatever the size of the claiminvolved, whether they are complex or dis-

DENMARK

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1

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

the parties present written submissions andproofs, and a plenary hearing, in which thecourt hears witness testimonies and theparties’ arguments.

Denmark does not have a system of com-mercial courts outside the Copenhagen area,which has a maritime and commercial court(Sø-og Handelsretten) presided by a panel ofprofessional and non-professional judgescompetent to hear cases involving commer-cial and maritime disputes, the law oncompetition and bankruptcy proceedings.


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WORLDDenmark

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EstoniaPopulation (million inhabitants): 1.3GDP (US$ million): 16,410


STRENGTHS• Implementation of far-reaching reforms

and maintenance of macroeconomicstability have fostered exceptionallyrapid improvement in the standard ofliving.

• The country is known for the flexibility ofits productive apparatus and the qualityof the business climate.

• Estonia has rapidly modernised itsindustry with development of theelectronics sector in particular.

• Public finances have been in surplus andgovernment debt has been negligible.

• The very substantial presence of foreignbanks has benefited the banking sector.

WEAKNESSES• Buoyant domestic demand and the high

import content of subcontracting-industry exports have generated largecurrent account deficits.

• With the economy very open to foreigntrade, sales performance abroad dependson international economic situation.

• High inflation has compromised chancesfor rapid admission to the euro zone.

• The expansion of credit, particularly forproperty, has been too rapid.

• The foreign debt burden, particularly inbanking, has grown strongly.

RISK ASSESSMENTAfter growing very rapidly, spurred by risingreal wages and the expansion of credit, theeconomy began to slow early last year. Risinginterest rates and the tightening of theconditions for extending credit led to aslowdown in spending on consumption and,linked with the end of the property boom, ininvestment. That trend should continue in2008, with GDP growth easing to a moresustainable level. Sectors linked to propertywill be weakened, but companies shouldcontinue to invest albeit at a slower pace.Similarly, the employment of Europeanstructural funds should support public in-vestment.

Inflation surged sharply in 2007 andshould remain high in 2008 amid continuinghigh oil prices, increases in excise taxes andpersistent tensions in the labour market. In

this context, adoption of the euro will beunlikely before 2011.

The expected import slowdown raiseshopes of stabilisation of the current accountdeficit although it should remain very large.Foreign debt, notably resulting from financ-ing granted by Nordic banking groups totheir local subsidiaries, will continue to growwith foreign direct investment only coveringthe current account deficit to a very limitedextent.

In the political arena, the riots triggeredlate April 2007 when government officialsundertook to move a statue to the glory ofSoviet Union soldiers brought to light thedifficulties with integration of the Russian-speaking minority. Although relations withRussia soured as a result, that should havelittle impact on the economy except transittrade. Since his party’s victory in the March

ESTONIA

41

1

2007 legislative elections, the incumbentprime minister has been leading a newcoalition that could prove shaky going for-

ward. But that will nonetheless be unlikelyto jeopardise the broad lines of economicpolicy.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.2 8.3 10.2 11.2 7.1 5.3Inflation (%) 1.3 3.0 4.1 4.4 6.4 7.4Public sector balance (%GDP) 1.8 1.8 1.9 3.6 3.0 1.9Unemployment (%) 10.0 9.7 7.9 5.9 4.7 4.8Exports 4,597 5,983 7,771 9,654 11,322 12,711Imports 6,164 8,002 9,675 12,613 14,695 16,389Trade balance −1,567 −2,019 −1,904 −2,959 −3,373 −3,678Current account balance −1,115 −1,458 −1,392 −2,581 −3,118 −3,418Current account balance (%GDP) −11.4 −12.2 −10.0 −15.5 −14.8 −13.7Foreign debt (%GDP) 72.0 84.2 81.2 101.2 104.6 99.3Debt service (%Exports) 10.6 11.8 12.1 13.2 14.7 16.4Foreign exchange reserves (in months ofimports)

2.0 2.0 1.8 2.0 2.3 2.2



■ Market overviewAt purchasing power parity, per capita GDPat end-2006 was 67 per cent of the EUaverage – the third highest in Central andEastern Europe, behind Slovenia and theCzech Republic, but ahead of Hungary. Theaverage gross wage in mid-2007 was €808,up 21.2 per cent on 2006.

■ Means of entryEstonia has founded its market economy onliberal trade principles. Until 2000, therewere no import duties. Since 1 July 2002,Estonia has applied the EU’s common exter-nal tariff to non-EU goods. Trade with EUcountries has been exempt from customsduties since EU-accession on 1 May 2004.Excise duties are levied on certain products,without any distinction between domesticand imported goods. Estonia administers asystem of non-tariff barriers based on auto-matic licensing for some products (wines andspirits, lubricants, drugs). The same licens-ing rules apply to domestically producedgoods. There are no restrictions on marketaccess. As expected, Estonia has clearlysoftened its stand vis-a-vis beef and pig

imports from France after EU accession. Thecountry’s standards legislation does not con-tain any restrictions of note that might serveto protect local industry. Although down-payments are advisable for initial businesstransactions, 30- or 60-day credit is the mostwidely used means of payment. Credit coveris advisable. The Estonian banking sector isperfectly sound. The four leading banks,owned by Swedish and Danish banks, ac-count for 97 per cent of the country’s bankingassets.

■ Attitude towards foreign investorsEstonia’s foreign investment law, in forcesince September 1991, provides for simpleand non-discriminatory company registra-tion procedures. A foreign company may holda 100 per cent stake in a local company.There is no special incentive scheme, andforeigners are accorded the same treatmentas nationals in matters of direct taxation.There are no restrictions on the repatriationof profits after-tax, dividends or proceedsfrom the sale or liquidation of an investment.Estonia has a reciprocal investment promo-tion and protection agreement as well as adouble taxation agreement with France, bothof which are in force. Personal income tax

EUROPE AND THE CIS

42

and corporation tax in 2007 were levied at aflat rate of 22 per cent. The rate is to belowered by one basis point a year until theend of the parliamentary term to 18 per centin 2011. Since 1 January 2000, retainedearnings have been tax-exempt. Estonianmanpower is an asset for foreign investorsas it is highly skilled. However, because ofrapidly rising wages, the country is no longera source of cheap labour. Social securitycontributions, borne entirely by employers,amount to 33 per cent of wages, of which 13per cent is for compulsory health insuranceand 20 per cent for pensions. Unemploymentcontributions – 0.5 per cent of an employee’swage borne by the employer and 1 per centby the employee – were introduced on 1

January 2002. A pension fund, the secondpillar of the country’s pension system, hasbeen in operation since 1 April 2002.

■ Foreign exchange regulationsWith an exchange rate parity of eight kroonsto the deutschmark that has remained un-changed since its launch in June 1992, theEstonian kroon is freely convertible andconsequently enjoys a de facto fixed exchangerate versus the euro (€1 = EEK 15.64664).Exchange controls have been abolished andlocal banks accept accounts in both local andforeign currency. Estonia joined ERMII inJune 2004, the last stage before the adoptionof the euro. However, rising inflation in anoverheating economy will delay entry intothe euro zone until 1 January 2011 or beyond.

ESTONIA

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1

OPPORTUNITY SCOPE



Mn USDMn USD


Finland LatviaSweden Russia USA RussiaFinland Germany LithuaniaSweden

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

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

IMPORTS by products

0

500

1000

1500

2000

0

500

1000

1500

2000

2500



Indicators Estonia Regional averageEmergingcountry average


EUROPE AND THE CIS

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FinlandPopulation (million inhabitants): 5.3GDP (US$ million): 209,600


RISK ASSESSMENTStrong growth continued in 2007, driven byforeign demand and household consumption.Exports remained at a good level, thanks toperformance in key sectors (electronics, me-chanical engineering) and the buoyant eco-nomic conditions enjoyed by Finland’s maintrading partners (Germany, Sweden andRussia). Despite an upsurge in inflation anda limited increase in wages, household con-sumption remained dynamic, thanks to animproving employment picture and an in-crease in spending from savings. Investmentwas mainly driven by non-residential con-struction and capital goods purchases bycompanies.

The growth rate will decline further in2008. Households will ease up somewhat onspending amid persistent inflationary pres-sures, more difficult conditions of access tocredit and high debt. Householdconsumptionwill nonetheless remain at a good level,thanks to the expected strong increase inwages and continuing withdrawals fromsavings, whose rate will significantlydecline.

Foreign demand, albeit less dynamic, willallow export growth to remain reasonablystrong despite the euro appreciation andconstraints related to production capacity.Residential investment will stall under theeffect of high interest rates whereas publicand commercial projects will remain verydynamic. The very satisfactory financial re-sults achieved by companies overall shouldallow them to cope with rising productioncosts and go forward with their investmentprogrammes. They will nonetheless have tocontend with a shortage of skilled labour.Public sector finances will continue to im-prove with the government having decidedto postpone tax reductions and give budget-ary priority to debt reduction.

Corporate bankruptcies stabilised at a lowlevel in 2007 attesting to their financialhealth overall, a fact borne out by the goodCoface payment incident index for Finland.The slowdown of household consumption andresidential construction should nonethelessaffect weaker companies in sectors like lei-sure, hotel-catering, distribution and sectorsconnected with the home.

FINLAND

45

1


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 2.4 3.5 2.9 5.0 4.3 3.4Consumption (var.) 4.4 3.2 3.8 4.3 3.5 3.0Investment (var.) 4.1 3.6 3.7 4.1 4.6 5.0Inflation 1.3 0.7 0.4 1.6 2.6 2.7Unemployment 9.1 8.9 8.4 7.7 6.7 6.4Short-term interest 2.3 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) 2.4 2.1 2.7 3.7 4.3 4.3Public sector debt (%GDP) 42.9 44.1 41.4 39.3 36 33Exports (var.) 1.5 8.6 7.1 10.4 6.8 5.5Imports (var.) 3.3 7.8 12.2 8.3 4.2 6.0Current account balance (%GDP) 6.5 7.7 4.9 5.8 5.2 5.0



■ PaymentBills of exchange are not commonly used inFinland because, as in Germany, they signalthe supplier’s distrust of the buyer. A bill ofexchange primarily substantiates a claimand constitutes a valid acknowledgement ofdebt.

Cheques, also little used in domestic andinternational transactions, only constituteacknowledgement of debt. However, chequesthat are uncovered at the time of issue canresult in the issuers being liable to criminalpenalties.

Moreover, as cheque collection takes par-ticularly long inFinland (20days fordomesticcheques or cheques drawn in European andMediterranean coastal countries, 70 days forcheques drawn outside Europe), this pay-ment method is not recommended.

Conversely, SWIFT bank transfers areincreasingly used to settle domestic andinternational commercial transactions.Finns are familiar with this efficient methodof payment. When using this instrument,sellers are advised to provide full and accu-rate bank details to facilitate timely pay-ment, while it should not be forgotten thatthe transfer payment order will ultimatelydepend on the buyer’s good faith.

■ Debt collectionOut-of-court collection begins with the debtorbeing sent a final demand for payment by

registered or ordinary mail in which he isasked to pay the outstanding principal to-gether with any contractually agreed inter-est. In the absence of an interest rate clausein the agreement, interest automaticallyaccrues from the due date of the unpaidinvoice at a rate equal to the Central Bankof Finland’s (Suomen Pankki) six-monthlyrate, calculated by reference to the EuropeanCentral Bank’s refinancing rate, plus sevenpercentage points (Interest Act Amendment,effective since 1 July 2002).

The Interest Act (Korkolaki) of 20 August1982 already requires debtors to pay upwithin contractually agreed timeframes orbecome liable to interest penalties. Note,moreover, that according to contract law theordinary term of limitation, previously 10years, has been reduced to three years since1 January 2004 and that it applies retroac-tively to contracts already in force. Forcertain documented and undisputed claims,creditors may resort to the fast-track proce-dure resulting in an injunction to pay (suppeahaastehakemus). This is a simple writtenprocedure based on submission of whateverdocuments substantiate the claim (invoice,bill of exchange, acknowledgement of debt,etc). The presence of a lawyer, althoughcommonplace, is not required for this type ofaction.

The reform of civil procedure, enacted on 1December 1993, requires plaintiffs to submitall supporting documents and evidence sub-

EUROPE AND THE CIS

46

stantiating a claim before the debtor is askedto provide, in response, a written statementexplaining his or her position. During thepreliminary hearing, the court bases itsdeliberations on the parties’ written submis-sions and supporting case documents. Thecourt then convokes the litigants to heartheir arguments and decide on the relevanceof the evidence. It is possible for the disputeto be resolved between the litigants duringthis preparatory phase of the proceedings.

Where the dispute remains unresolvedafter this preliminary hearing, plenary pro-ceedings are held before the court of firstinstance (Karajaoikeus) comprising one tothree presiding judges depending on thecase’s complexity. During this hearing, thejudge examines probative documentary evi-dence, hears the parties’ witnesses and the

litigants state their final claims before thejudge delivers the ruling very rapidly, gen-erally within 14 days. The losing party isliable for all or part of the legal costs incurredby the winning party. The average timerequired for obtaining a writ of execution isabout 12 months.

Commercial cases are generally heard bycivil courts, although a Market Court (Mark-kinaoikeus), located in Helsinki, has been inoperation as a single entity since the 1 March2002 merger of the Competition Council andthe former Market Court.

This court is competent to examine fraud-ulent business practices, denounce unfairtrading, investigate corporate mergers, de-liver prohibition orders against such prac-tices and slap fines on offenders.


0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDFinland

FRANCE

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FrancePopulation (million inhabitants): 63.4GDP (US$ million): 2,248,000


STRENGTHS• Good demographics facilitate

generational renewal and spur householdspending.

• Diversification of energy supply sourceshas resulted in relative energyindependence.

• France boasts a trove ofinternationalised and completive majorgroups in many fields including energy,pharmaceuticals, cosmetics, luxury anddistribution.

• A dynamic banking and financial sectorhas a strong presence abroad.

• A highly skilled labour force and highhourly productivity partly compensatefor a short work year.

• Good quality infrastructure contributesto the country’s attractiveness totourists.

WEAKNESSES• The public finance deficit and debt are

too high, particularly in view of thegrowth of health and pension spending.

• The concentration of decision-makingauthority in Paris and the multiple localadministrative levels has not beenconducive to reducing geographicinequality.

• Deficiencies in education and traininghave not facilitated access to theemployment market for youth and therelatively unskilled.

• The investment effort on R&D remainsinadequate.

• A somewhat unsuitable sectoralspecialisation and the limited presence ofFrench companies in high-growthemerging regions have affected foreigntrade performance.

RISK ASSESSMENTEconomic growth was slightly slower in 2007,underpinned mainly by household consump-tion (57 per cent of GDP). Spending did notaccelerate as expected, however, with house-holds preferring to increase their savingssubstantially. The tax exemption granted forinterest on property loans made it possibleto postpone a soft landing for residentialinvestment. Corporate productive invest-ment remained at an acceptable levelspurredby a lack of production capacity in manysectors. Foreign trade again made a slightlynegative contribution to growth.

The growth trend should remain steady in2008. Households should continue to spend

at essentially the same rate registered lastyear with additional tax breaks partly offset-ting rising prices for energy and food prod-ucts. Stricter conditions for property loanswill affect residential investment, which willcontinue to mark time and therebycontributeto the job creation slowdown. Public works,meanwhile, will remain buoyant, thanks toorders from local communities spurred bymunicipal elections. Higher loan rates anddifficulties in arranging financing shouldprompt companies to postpone somewhattheir investment project. The continuingdecline of their profitability (down from 8.5per cent of GDP in 2000 to 5.2 per cent in2007) and cash flow ratios – (from 85 per cent

EUROPE AND THE CIS

48

in 2000 to 60 per cent in 2008) has madethem particularly sensitive to the cost of thecredit on which they have increasingly reliedsince 2004. The weaker domestic demandwill slow the growth of imports. Less buoyantdemand from European trading partnersandthe euro appreciation in dollar zones willkeep exports from achieving enough growthto improve the current account balance.

Bankruptcies have begun to increaseagain(up 9 per cent in the first half last year). Thistrend reflects the erosion of corporate mar-gins, 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 beenexacerbated by excessively slow productivitygrowth coupled with the overly steep rise oflabour costs. Rising agricultural raw mate-rial prices could undermine certain intensivegrain-user food sectors like meat and dairyproducts. The situation has, moreover, re-mained shaky in subcontracting to the carindustry and aeronautics, paper/cardboardprocessing and textiles. The Coface paymentincident index has nonetheless stabilisednear the world average, and companiesshould generally remain profitable in 2008.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.1 2.5 1.7 2.0 1.9 1.9Consumption (var.) 2.0 2.5 2.2 2.2 2.0 2.1Investment (var.) 2.2 3.6 4.0 4.1 3.7 2.8Inflation 2.1 2.1 1.7 1.9 1.5 2.1Unemployement 9.8 9.6 9.7 9.5 8.6 8.2Short-term interest rate 2.3 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) −4.1 −3.6 −2.9 −2.6 −2.5 −2.6Public sector debt (%GDP) 62.3 64.9 66.7 64.2 63.9 63.8Exports (var.) −1.2 4.0 2.8 6.3 3.5 3.1Imports (var.) 1.5 7.1 5.0 7.0 4.5 4.4Current account balance (%GDP) 0.8 −0.6 −1.7 −1.3 −1.3 −1.7



■ SteelProduction eased 1.5 per cent in the first10 months of 2007. Flat-product activityremained at a generally satisfactory level,thanks notably to the many new models puton the market by carmakers. Long productsbenefited from European demand for heavyvehicles and from building activity that onlybegan to slow late last year. The marketshould steady this year with neither produc-tion nor demand varying much, while theindustry will be slow to pass on rising inputcosts in sales prices. A marked growth ofdemand from the car, aeronautics and railindustries will offset sluggish demand fromthe construction and home appliance sectors.

■ Building and public worksThe residential property segment slowed in2007 with building permits and new housingstarts down slightly. Under the effect of thesales slowdown notably in the new and high-end segments, stocks increased and priceslevelled off or even declined. Prices shouldcontinue to ease in 2008. Faced with uncer-tainties linked to the subprime crisis in theUnited States and more difficult conditionsof access to credit, households could elect towait for a decline in housing prices. Thepublic works segment will continue to trendup in the run-up to municipal elections.

■ Textiles and clothingBusiness conditions were good in the firstnine months last year, with the consumption

FRANCE

49

1

of clothing up 3 per cent in value terms andof textiles nearly 2 per cent. Sales abroadalso performed well to European partners aswell as to Euromed countries for textiles withthat segment beginning to benefit from itspositioning in high value-added technicaltextiles. French textiles and clothing compa-nies registered a slight increase in turnover.That trend reflects the overall improvementin the sector, which has nonetheless re-mained pregnant with risk.

■ Paper-cardboardThe level of orders in the sector – whetherfor art paper or packaging paper – was verysatisfactory in both the domestic and exportmarkets. In 2008, the sector will continue,however, to contend with the increasing costof fibrous raw materials, due especially tothe sharp increase, since July 2007, of dutieson wood imported from Russia. Prices shouldcontinue to rise, spurred by rising productioncosts, notably higher energy prices. NorthAmerican competition, meanwhile, will con-tinue to affect the newsprint market.

■ Mechanical engineeringNew orders continue to trend up in the sectorfor all segments except transmission manu-facturers, which seem to have reached athreshold. Sector growth could suffer in 2008from the investment slowdown albeit partlyoffset by a good export trend reflecting thestill strong demand from emerging markets.The precision engineering segment will alsoparticipate in the buoyant conditions in thesector.

■ AutomotiveWith passenger car registrations up 1.7 percent in the first 11 months last year, nationalcarmakers have nonetheless seen sales andproduction decline. In the West Europeanmarket, which has begun to strengthen (up1.1 per cent in volume terms), the PSAPeugeot Citroen Group succeeded in stabilis-ing sales growth at about 1 per cent whereasRenault registered weaker performance al-beit offset by success with the Logan. Thetwo carmakers managed to improve theiroperating margins in 2007, thanks to drasticcost cutting. This year, they will have to

continue to cope with high input prices andenvironmental restrictions on CO2 emissionswhose negative impact Moody’s estimates at1 per cent of operating margins. Parts man-ufacturers should continue to experience aprocess of alliance making and acquisitions.


■ PaymentAmong methods of payment, the bank cardis now the instrument used most in France,dethroning cheques, which are nonethelessstill widely used. In 2006, bank cards repre-sented 38 per cent of the payment operationscleared through the interbank systemagainst nearly 26 per cent for cheques.*.

For cheques remaining unpaid over 30days from the date they were first presentedfor payment, the beneficiary may immedi-ately obtain an enforcement order (withoutthe need of further procedural act or cost)based on a certificate of non-payment pro-vided by his or her banker after a secondunsuccessful presentation of the check forpayment and where the debtor has notprovided proof of payment within 15 days offormal notice to pay served by a bailiff (articleL 131-73 of the monetary and financial code).

Bills of exchange, a much less frequentlyused mode of payment than cheques, havebeen in virtually constant decline in terms ofnumber of operations with volume remainingessentially steady in value terms. Bills ofexchange are attractive forcompaniesinsofaras they may be discounted or transferred,thus providing a valuable source of short-term financing. Moreover, they allow credi-tors to bring legal recourse in respect of‘exchange law’ (droit cambiaire) and areparticularly suitable for instalment pay-ments.

Still lagging behind cheques, the use oftransfers increased in 2006 representingabout 17 per cent of total interbank opera-tions. In value terms, however, cheques andtransfers still represent most of script pay-ment volume with 36 and 37 per cent,respectively, of the total amount processed.*Bank transfers can be made within Franceor internationally via the SWIFT electronicnetwork used in French banking circles,

EUROPE AND THE CIS

50

which offers a reliable platform for timelypayment subject to mutual trust and confi-dence between suppliers and their custom-ers.

■ Debt collectionSince the new economic regulations law of 15May 2001, commercial debts automaticallybear interest from the day after the paymentdue date shown on the invoice or specified inthe commercial contract. Unless the termsand conditions of sale stipulate interest ratesand conditions of application, the applicablerate will be the interest rate applied by theEuropean Central Banks in its most recentrefinancing operations, increased by sevenpercentage points.

Serving the debtor with formal notice topay the principal claim and interest duenonetheless remains a precondition for anylegal action taken by creditors. Where a debtclaim results from a contractual undertakingand is both liquid and indisputable, creditorsmay use the injunction-to-pay procedure(injonction de payer), a flexible system basedon the use of pre-printed forms not requiringapplicants to argue their case before themagistrates’ court (tribunal d’instance) orcompetent commercial court – the courthaving jurisdiction in the district where thedebtor’s registered offices are located. Viathat procedure, credits can rapidly obtain acourt order to be served subsequently bybailiff.

A fast-track procedure (refere-provision)provides creditors with a rapid means of debtcollection, even in routine cases lacking anyreal urgency, provided the claims are notsubject to substantive dispute; in such cases,the judge can grant a provisional payment infavour of the applicant than can representup to 100 per cent of the claim.

However, the summary procedure requiresthe presence of an attorney to represent thecreditor in court. If a claim proves to belitigious, the judge competent to rule onspecial urgency (juge des referes) evaluateswhether the claim is well founded. As appro-priate, the judge may then declare himself orherself incompetent and, based on his or herassessment of the apparent validity of thecase, invite the plaintiff to seek a ruling onthe substance of the case through the formalcourt process.

Formal procedures of this kind permithaving the validity of a claim recognised bythe court, a relatively lengthy process lastingabout a year or more owing to the emphasisplaced on the adversarial nature of proceed-ings and the numerous phases involved inthe French procedural system: submission ofsupporting case documents, written submis-sions by the litigants, examination of thetypes of evidence, various recesses for delib-erations and so on.

If justified by a claim’s size and theuncertain solvency of the debtor, legal actionmay include a petition to obtain an attach-ment order on available assets and therebyprotect the plaintiff’s interests pending com-pletion of the proceedings and enforcementof the court’s final verdict.1


0

50

100

150

200

250

300

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDFrance

1 Source: French Banking Federation and GSIT

GEORGIA

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GeorgiaPopulation (million inhabitants): 4.4GDP (US$ million): 7,550

Country @rating: CMedium-term rating: High riskBusiness climate rating: C

RISK ASSESSMENTThe influx of foreign capital and a goodharvest allowed Georgia to achieve near 10per cent growth despite Russian sanctions,with it successfully redirecting its exportstowards Turkey and the EU. The dynamismof manufacturing, construction and telecom-munications sectors combined with goodperformance in agriculture.

Growth should remain strong in 2008. Thiswill cause substantial deterioration ofexternal accounts, however. The resultingtrend is unsustainable in the long term,especially due to Georgia’s many persistentweaknesses, which include an indus-trial apparatus lacking competitiveness, avery insufficient savings rate and a bloatedinformal sector.

Economic conditions have nonetheless im-

proved markedly since the rose revolution in2003, thanks to significant progress on gov-ernance, privatisations and establishment ofa more stable macroeconomic framework.Financially, there has also been notableimprovement as much in public sector ac-counts as in foreign indebtedness. This im-provement has nonetheless mainly benefiteda minority of the population, essentially theyoung and educated. The continued ascen-dancy of the opposition, which forced Presi-dent Saakachvili to bring the presidentialelections forward to January 2008, shouldnonetheless not jeopardise the economic lib-eralisation policy. Relations with Russiaconstitute the main risk and they shouldremain very tense, much like the situationwith the two separatist regions, Abkhaziaand South Ossetia.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 11.1 5.9 9.6 9.4 10.0 7.5Inflation (%) 4.8 5.7 8.3 9.2 8.5 6.9Public sector balance (%GDP) −2.5 −0.2 −2.4 −2.8 −1.3 0.5Exports 730 1,272 1,472 1,667 1,788 1,947Imports 1,328 1,991 2,686 3,686 4,498 5,056Trade balance −598 −719 −1,214 −2,019 −2,710 −3,109Current account balance (%GDP) −7.4 −8.4 −9.8 −13.8 −16.0 −15.2Foreign debt (%GDP) 46.4 36.2 27.1 21.9 17.5 15.2Debt service (%Exports) 8.0 8.3 6.6 6.7 5.5 3.2Foreign exchange reserves (in months ofimports)

1.2 1.7 1.6 2.4 3.5 3.6


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GermanyPopulation (million inhabitants) : 82.3GDP (US$ million) : 2,913,200


STRENGTHS• Good geographic and sectoral

specialisation allied with highcompetitiveness has generated an ampletrade surplus.

• Smaller – Mittelstand – companies play apivotal role in the German economy asregards employment, innovation andcompetitiveness.

• ‘Co-determination’ of joint-stockcompanies, mandatory with over 500employees, has fostered consensus onstrategic decisions, particularly involvingrestructuring.

• Restoring equilibrium to public andsocial security accounts has given thegovernment more room for manoeuvre.

• The presence of Central and EastEuropean countries in the EU and theirgeographic proximity have providedcompanies with sales and productionopportunities.

WEAKNESSES• Marked regional disparities between the

traditional economic fabric in the Northand the growth-sector focus in the Southcompound the persistent problem posedby the lagging economies of the EasternLander (federal states).

• The familial character of Mittelstandcompanies tends to complicate matters inobtaining bank financing that mustcomply with Basel II transparency rules.

• Despite mergers the banking landscapeis still fragmented, which tends toundermine bank profitability.

• The inadequacy of facilities for smallchildren has contributed to the low birthrate and the ageing of the population,which, in turn, have affectedconsumption.

• The inadequate general education ofmany youth has led companies to reducetheir involvement in the apprenticeshipprogrammes that concern two-thirds of agiven age group and has also contributedto a lack of engineers.

RISK ASSESSMENTExports and productive investment were themain economic engines again in 2007, withexports holding up well in the face of the euroappreciation against the dollar. They com-prise mostly capital goods, high-end cars andchemical and pharmaceutical products rela-tively insensitive to price variations. Moreo-ver, 60 per cent go to the EU with a goodproportion of the balance representing sales

to emerging countries in Asia and Centraland Eastern Europe where demand hasremained strong. Expiry of advantageousamortisation rules late last year spurredproductive investment. Household consump-tion and residential construction sufferedconversely from the increase in VAT.

A slowdown is expected in 2008 with asmaller positive contribution from foreigntrade not offset by the recovery of private

GERMANY

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1

consumption. The growth of exports will beslower due to the still unfavourableexchange-rate effect on price-competitive-ness and to the economic slowdowns inEurope and the United States. Importgrowthwill remain strong meanwhile reflecting therevival of household demand, buoyed by thecontinuing decline of unemployment and theconcomitant decline in the unemployment-insurance contribution rate as well as byincreases in civil service wages, pensions andaid for the education of children. The revivalof private consumption will nonetheless bemodest due to the unfavourable effect of therising cost of credit as well as of energy andfood. Faced with weaker foreign demand,industry will slow the pace of its investments.

Corporate payment behaviour has re-mained good as evidenced by the excellentlevel of the Coface payment incident indexfor Germany and the 8 per cent decline inbankruptcies in the first nine months of 2007.The reduction of corporate income tax thisyear in a context of balanced public financeswill have a positive influence on that trend.The residential construction sector will re-main mired in difficulty, however, particu-larly in the eastern regions. The kitchenfurniture sector also presents a high-riskprofile at this juncture. The automotivesubcontracting sector, meanwhile, has suf-fered from the increasing pace of relocationsto the eastern part of the continent.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth −0.2 0.6 1.1 3.0 2.6 1.9Consumption (var.) 0.2 −0.3 0.1 1.1 −0.2 1.9Investment (var.) 0.9 4.4 6.0 8.2 8.0 3.4Inflation 1.0 1.8 1.9 1.7 2.1 2.2Unemployment 9.3 9.7 10.7 10.8 9 8.4Short-term interest 2.3 2.1 2.2 3.1 3.9 4.0Public sector balance (%GDP) −4.0 −3.7 −3.4 −1.6 0.1 −0.1Public sector debt (%GDP) 63.8 65.0 68.0 68.0 65 63Exports (var.) 2.5 10.0 7.1 12.9 8.4 5.5Imports (var.) 5.4 7.2 6.7 11.5 6.4 6.0Current account balance (%GDP) 2.1 4.5 4.7 5.0 5.9 5.8



■ ConstructionTotal turnover for the sector was up 4.5 percent in 2007. This represents the net resultof an 18 per cent increase in the commercialproperty segment, up 6.0 per cent for publicworks and down 5.0 per cent for a residentialsegment affected by a three-point VAT in-crease and elimination of tax breaks forowner-occupants. Turnover should still in-crease 3 per cent this year, thanks to non-residential construction and public works.The residential segment, except for renova-tion, should be flat. Corporate financialhealth, particularly for smaller companies,will remain precarious amid the rising cost

of materials and the shortage of specialisedlabour. On average, margins should remainbelow 1 per cent.

■ SteelNational steel production rose 3 per cent in2007, which assured German Steel – theEuropean leader – of high-capacity utilisa-tion. Despite forecasts of rising energy andraw material costs and continuing unfavour-able exchange rates, the outlook for 2008 isbright. Demand will increase 1.5 per cent,with economic conditions remaining buoyantin steel-using sectors, exemplified by thecapital good sector and the car industry,where export sales increased. High produc-

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tivity will offset the relatively higher cost ofenergy in Germany.

■ Mechanical engineeringBoth export (80 per cent) and domesticactivity were dynamic in 2007, and 2008should be another growth year. Despiteunfavourable exchange rates and cost in-creases resulting from the shortage of speci-alised labour, margins should remain amplein the sector.

■ PaperThe German paper industry, the Europeanleader, posted a 3 per cent increase inproduction in 2007 with sales particularlydynamic in the domestic market (up 4.8 percent) and Central and Eastern Europeancountries (up 4.6 per cent). Outside Europesales declined 11 per cent, however, due tothe effect of unfavourable exchange ratesand rising production costs. The trend thisyear is towards stagnation of both productionand sales but with sales outside Europestabilising.

■ Food production and distributionThe increase in VAT did not apply to basicfoodstuffs. For the products affected, dis-counters (Aldi/Lidl) used their clout to obtainagreement from suppliers not to pass on theentire increase. Prices nonetheless rose dueto increasing raw material costs. The meatsector suffered again from scandals andlocalised break-outs of avian flu pandemicthat undermined consumer confidence andaffected prices. Exports to the easternportionof the continent have considerably increased.

■ FurnitureThe sector grew 7 per cent in 2007, thanks toa dynamic office and shop segment (up 17per cent). While the VAT increase affectedthe domestic market, exports increased sig-nificantly including sales to the EU. Theconcentration process continued in the sec-tor, with some established companies likeSchieder Imperium disappearing. The trendshould remain favourable overall in 2008.


■ PaymentStandard payment instruments such as billsof exchange and cheques are not used very

widely in Germany. For Germans, a bill ofexchange implies a precarious financial po-sition or distrust on the part of the supplier.

Cheques are not considered a payment assuch but a ‘payment attempt’. As Germanlaw ignores the principle of covered cheques,the issuer can cancel payment at any timeand on any ground.Bounced cheques aretherefore fairly common. Bills of exchangeand cheques clearly do not seem to beeffective payment instruments even thoughthey entitle creditors to access a fast-trackprocedure for debt collection.

Bank transfer (Uberweisung), by contrast,remains the prevalent means of payment.Leading German banks are connected to theSWIFT network, which enables them toprovide a quick and efficient funds transferservice.

■ Debt collectionThe collection process begins with the debtorbeing sent a final demand for payment, viaordinary or registered mail, reminding himor her of his or her contractual obligations.The law on ‘speedier matured debts’, in forcesince 1 May 2000, states that, where the duedate is not specified in the conditions of sale,the customer is deemed to be in default if hedoes not pay up within 30 days of receipt ofthe invoice or a demand for payment and isliable to interest penalties thereafter.

From 1 January 2002, the benchmarkdefault interest rate is the Bundesbank’s six-monthly base rate, calculated by reference tothe European Central Bank’s refinancingrate, plus eight basis points for retailers orcommercial companies and five basis pointsfor consumers (non-commercial).

If payment or an out-of-court settlement isnot forthcoming despite this approach, thecreditor must initiate court proceedings.Provided a claim is payable and uncontested,the creditor can seek an injunction to pay(Mahnbescheid) through a simplified andinexpensive procedure involving the use ofpre-printed forms and resulting in a writ ofexecution fairly quickly. This procedure hasbeen standardised and automated in mostLander.

Foreign creditors must file their claim withthe Schoneberg Court in Berlin, which, after

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examining the claim, may deliver an injunc-tion to pay. The debtor is given two weeks topay up or challenge the injunction (Wider-spruch).

Ordinary legal proceedings tend to be oral,with the judge reaching his decision on thearguments presented by both parties presentin court. If the case is contested, the judgehears the litigants or their lawyers and asksthem to submit any evidence deemed rele-vant by him or her, which he or she alone isthen authorised to assess. Each litigant isalso requested to submit a pleading memo-randum outlining his or her expectations,within the specified time limit.

Once the claim has been properly exam-ined, a public hearing is held at which the

court hands down a well-founded judgement.The reform of civil procedure, enacted on 1January 2002, is designed to provide allGerman citizens with more transparent,timely and effective application of the law.The new measures encourage parties toattempt conciliation before resorting to legalaction and give the district courts (Amtsgeri-chte) stronger powers. They also require themajority of cases to be settled in first in-stance, either through an out-of-court settle-ment or through a court decision. An appealwill thus only entail verifying whether a caseinvolves a question of principle or necessi-tates revision of the law in order to ensure‘consistent jurisprudence’.


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WORLDGermany

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GreecePopulation (million inhabitants): 11.1GDP (US$ million): 308,400


RISK ASSESSMENTThe economy continued to grow strongly in2007, driven by domestic demand. Householdconsumption continued to benefit from abright job picture, wage growth and a creditexpansion. The reduction of corporate incometax and the undertaking of large infrastruc-ture projects have spurred corporate invest-ment. Although exports continued to grow,the increase was not enough to significantlyreduce the current account deficit with im-ports still rising too rapidly. The public sectordeficit remained under control despite addi-tional spending associated with the summerfires and preparations for early generalelections. Proceeds from privatisations wereallocated to the reduction of public sectordebt.

The economy will post strong growth againin 2008. Households spending will continueat a high rate despite high interest rates andslower wage growth. Continuation of publicinvestment programmes partly funded byEurope will spur corporate investment andconstruction. The current account balancewill continue to show a large deficit despitevery good export performance supported bythe dynamism of the tourism industry andthe merchant navy, which has capitalised onthe increase in world trade and freight rates.The reduction of the public deficit may be

significant, thanks to the slowdown of gov-ernment operating expenses and the addi-tional revenues resulting from taxes bothindirect (VAT) and direct (the campaignagainst tax evasion). Continuation of theprivatisation programme, particularly in thetelecommunications sector, will contribute toreduction of public debt pending the healthand pension system reforms essential tokeeping public accounts under control in themedium term.

The downward bankruptcy trend and sta-bilisation of the Coface payment incidentindex near the world average reflect thebuoyant growth. Corporate profitability hasimproved, thanks to the reduction of incometax, modernisation of the financial systemand reform of the corporate legal framework.Weaknesses have persisted in the clothingand shoe industries, both exposed to Asianand Eastern European, and in commercialdistribution where small family companieswill continue to suffer from the competitionof major international players. In the exportmarket, the competitiveness of Greek com-panies has been eroding, affected by unitlabour costs higher than those of euro zonepartners. The A2 business climate rating isborn out by the complex and ponderousimplementation of legal collection procedu-res.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 4.6 4.7 3.7 4.3 4 3.7Consumption (var.) 4.5 4.4 3.7 3.8 3.6 3.2Investment (var.) 13.3 5.8 0.2 12.9 7.8 7Inflation 3.4 2.9 3.5 3.2 2.8 2.7Unemployment 9.9 10.5 9.8 8.9 8.9 8.4Short-term interest 2.3 2.1 2.2 3 4 4Public sector balance (%GDP) −4.2 −7.9 −5.5 −2.5 −2.9 −1.8Public sector debt (%GDP) 98.2 98.4 98 95.3 93.7 91.1Exports (var.) 4 11.7 2.8 5.4 6.6 5.1Imports (var.) 4.8 9.3 −1.3 9.8 7.7 7Current account balance (%GDP) −6.4 −7.6 −9 −11.1 −10.8 −10.8



■ PaymentBills of exchange are widely used by Greekcompanies in domestic and internationaltransactions and, along with promissorynotes, are no longer subject to stamp dutyfrom 1 January 2002. In the event of paymentdefault, a protest certifying the dishonouredbill must be drawn up by a public notarywithin two working days of the due date.

Similary, cheques are still widely used ininternational transactions. In the domesticbusiness environment, however, cheques arecustomarily used less as an instrument ofpayment than as a credit instrument,makingit possible to materialise successive paymentdue dates. Post-dated endorsed by severalcreditors thus represent common and wide-spread practice. Furthermore, issuers ofdishonoured cheques may be liable to prose-cution, provided a complaint is lodged.

Promissory letters (hyposhetiki epistoli)are another means of payment widely usedby Greek companies in international trans-actions. They are a writtenacknowledgementof an obligation to pay issued to the creditorby the customer’s bank committing themaker to pay the creditor at a contractuallyfixed date.

Although promissory letters are a suffi-ciently effective instrument in that theyconstitute a clear acknowledgement of debton the part of the buyer, they are not deemed

a bill of exchange and so fall outside thescope of the ‘exchange law’ (droit cambiare).SWIFT bank transfers, well established inGreek banking circles, are used to settle agrowing proportion of transactions and offera quick and secure method of payment.

■ Debt collectionThe recovery process commences with thedebtor being sent a final demand for paymentby registered mail, reminding him or her ofhis or her payment obligations, includinganyinterest penalties as may have been contrac-tually agreed or, failing this, those accruingat the legal rate of interest.

Under a presidential decree passed on 5June 2003, interest is due from the dayfollowing the date of payment stipulated inthe invoice or commercial agreement at arate, unless the parties agree otherwise,equal to the European Central Bank’s refi-nancing rate, plus seven percentage points.Creditors may seek an injunction to pay(diataghi pliromis) from the court via alawyer under a fast-track procedure thatgenerally takes one month from the date oflodging of the petition.

To engage such a procedure, the creditormust possess a written document substanti-ating the claim underlying his or her lawsuit,such as an accepted and protested bill, anunpaid promissory letter or promissory note,an acknowledgement of debt established byprivate deed or an original invoice summar-

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ising the goods sold and bearing the buyer’ssignature certifying receipt of delivery or theoriginal delivery slip signed by the buyer.

The ruling issued by the judge allowsimmediate execution subject to the rightgranted to the defendant to lodge an appealwithin 15 days. An appeal will generally nothave suspensive effect. To obtain suspensionof execution, the debtor must petition thecourt accordingly.

Based on competence thresholds in effectsince 1 October 2003, a ‘justice of the peace’(Eirinodikeio) hears claims up to €12,000.Above that amount, a court of first instancepresided by a single judge (Monomeles Pro-todikeio) hears claims not exceeding €80,000and set up with a panel of three judges(Polymeles Protodikeio) to hear larger claims.

Regarding the latter court with a collegialcomposition, conforming to the provisions ofthe civil procedure code, a prior attempt bythe parties to settle out of court, under theaegis of the claimant’s lawyer, is mandatorysince September 2002, subject to inadmissi-bility of the claimant’s writ. Where creditorsdo not have written and clear acknowledge-ment of non-payment from the debtor, orwhere the claim is disputed, the only remain-ing alternative is to obtain a summons underordinary proceedings.

Such litigation can take over a year, eventwo years, depending on the backlog of casesin each jurisdiction and the complexity of theaction, whether it requires extensive evi-dence – such as examination of all thedocuments related to a commercial transac-tion – and obligatory witness testimonies.


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WORLDGreece

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HungaryPopulation (million inhabitants): 10.1GDP (US$ million): 112,899


STRENGTHS• Hungary remains among the most

advanced Central Europe countries interms of reforms.

• Integration into the European Union hasenhanced the prospects for growth.

• The country’s infrastructure, work force,regulatory framework and bankingsystem are of good quality.

WEAKNESSES• The situation of public finances and

external accounts remains nettlesome,and FDI covers only a limited proportionof financing needs.

• The levels of government and foreigndebt have been high.

• Foreign exchange reserves are limited.• The rapid increase in loans denominated

in foreign currencies has increased theexposure of banks to exchange rate risk.

• Social tensions have hindered reformimplementation.

RISK ASSESSMENTGrowth slowed under the effect of austeritymeasures. Both private and public consump-tion declined in 2007. Investment growthwas weak due to higher taxes and a declinein consumption spending, which squeezedcorporate profit margins. Foreign trade wasthe main growth engine. The decline inpublicsector orders and household purchasingpower weakened the construction industryand sectors associated with consumption.The increase in the Coface payment incidentindex for the past few months reflects thatdeterioration of corporate solvency. Exportsectors (vehicles, electronics and telecom-munications, pharmaceuticals and manufac-tured products) are still buoyant, however,and growth should gradually recover thisyear with domestic demand growing strongerand the effects of the austerity measureswaning.

Although the increase in indirect taxes andadministered prices contributed to an up-surge in inflation, it also facilitated reducingthe public deficit to more sustainable levels.Government debt, albeit still high, has beenlevelling off (66 per cent of GDP). An importslowdown, meanwhile, made it possible tolimit the increase in the current accountdeficit and slightly reduce it in relation toGDP. The growth recovery and continuedwidening of the deficit in the investmentincome balance should, however, result infurther widening of the current accountdeficit in 2008. In this context, foreign debtshould remain steady at a high level withforeign exchange reserves remaining rela-tively limited. The forint, shaken by theturbulence triggered last summer by thesubprime mortgage crisis in the UnitedStates, remains among the region’s mostvulnerable currencies.

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The forint exchange rate trend will con-tinue to depend heavily on whether thecentre-left government lives up to its com-mitments on fiscal matters. Unpopular and

increasingly riven by internal divisions, how-ever, it has limited capacity to pursue publicspending reform.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.2 4.8 4.1 3.9 2.0 3.0Inflation (%) 4.9 6.8 3.7 4.1 7.8 4.5Public sector balance (%GDP) -7.2 -6.5 -7.8 -9.2 -6.4 -4.2Unemployment (%) 5.9 6.1 7.2 7.5 7.4 7.5Exports 42.9 55.7 62.2 74.4 87.2 98.3Imports 46.2 58.7 64.0 75.5 86.9 99.0Trade balance -3.3 -3.0 -1.8 -1.2 0.3 -0.7Current account balance -6.7 -8.6 -7.6 -7.3 -7.5 -9.2Current account balance (%GDP) -8.0 -8.4 -6.8 -6.5 -5.8 -6.3Foreign debt (%GDP) 68.9 73.5 71.1 96.7 94.5 96.5Debt service (%Exports) 14.2 14.8 12.2 12.8 12.2 12.4Foreign exchange reserves (in months of imports) 2.5 2.5 2.6 2.6 2.6 2.4



■ Means of entryFollowing EU membership on 1 May 2004and despite some difficulties over harmoni-sation with Community regulations, thereare no longer any obstacles to trading withHungary today. However, exporters shouldnote the existence of a fairly expensive andlengthy registration procedure for cosmetics.In addition, vehicle registration tax for usedcars purchased in another member state canbe fairly high depending on the vehicle’s ageand pollution rate. Finally, while publicprocurement legislation complies with com-munity law, its application is not entirelysatisfactory and tendering procedures still,at times, lack transparency.

■ Attitude towards foreign investorsMindful of the importance of FDI in thecountry’s modernisation and in the financingof its external trade deficits, Hungary hasbeen quick to develop a foreign investor-friendly legal and economic system. Thissystem served as a bulwark for the privatis-ations carried out in the 1990s and facilitatedmassive capital inflows into the Hungarianeconomy (around €62 billion over 15 years).

With the privatisation programme nearingcompletion (1,600 of the 1,700 state-ownedenterprises have been privatised), for thelast two years the Hungarian governmenthas been pursuing a proactive policy ofmaintaining FDI inflows. Its strategy con-sists in making Hungary a high added-valueinvestment hub and a regional base forexports and production. To this end, invest-ment grants favour technology projects, re-gional service centres and logisticsplatforms.Tailored grants encourage investmentsdeemed of ‘strategic’ or ‘national’ importance.The threshold for such grants is €10 million.Investments below this amount are eligiblefor grants only through EU structural funds.As well as subsidies, labour and taxationcosts have to be factored in. The averagegross monthly wage is €650. Corporation taxstands at 16 per cent. A 4 per cent solidaritytax came into effect in 2007. Employer socialsecurity contributions are 33.5 per cent. Insum, the cost factors are competitive for thispart of Central Europe. Investment in Hun-gary is unrestricted, regardless of the sourceof funds or the size of foreign shareholdings.The only restrictions relate to the acquisitionof farmland and forests, in respect of which

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Hungary has obtained a transition perioduntil May 2011. It has been granted aderogation until May 2009 for the purchaseof secondary residences by foreigners.

■ Foreign exchange regulationsSince the widening of the forint’s fluctuationband to ±15 per cent in May 2001 (versus abenchmark of HUF282 to the euro), theHungarian currency has been subject to afair degree of fluctuation but has remainedwithin the top half of its fluctuation band,reaching its ceiling of 240 forints to the euroin April 2005. Since mid-2006, the forint hasbeen fairly volatile mainly due to a higherthan expected budget deficit. The exchangerate in August 2007 was HUF263 to the euro.Since September, the forint has edged backto HUF250 to the euro. Key interest ratesremain fairly high in Hungary, rising from 6per cent in September 2005 to 7.75 per centin September 2006, before falling to 7.5 percent in September 2007.


■ PaymentBills of exchange and cheques are not com-monly used since their validity depends oncompliance with several formal issuing re-quirements. For dishonoured and duly pro-tested bills and cheques, creditorsnonetheless have recourse to a summaryprocedure to obtain an injunction to pay.

The promissory note in blanco (ures atru-hazas), which involves an incomplete pay-ment deed when issued – with only the termpromissory note and the issuer’s signatureappearing on it – and a complement ofmissing elements upon collection, is muchless common than in Poland.

Bank transfers are by far the most commonpayment method. After successive phases ofprivatisation and concentration, the mainHungarian banks are now connected to theSWIFT network, which provides low cost,flexible and speedy processing of domesticand international payments.

■ Debt collectionIt is advisable, where possible, to avoidtaking legal action locally due to the formal-

ism and high cost of legal procedures andlengthy court proceedings: it takes almosttwo years to obtain a writ of execution due tothe lack of judges with adequate training inmarket economy practices and proper equip-ment. Service of a demand for paymentaccompanied by proof of debt reminds thedebtor of his obligation to pay the outstand-ing sum plus any accrued interest.

Since 1 May 2004, interest is due from theday after the payment date stipulated in thecommercial contract and, unless otherwiseagreed by the parties, the applicable rate willbe the base rate of the National Bank ofHungary (Magyar Nemzeti Bank) in force onthe last day preceding the reference half-year, plus seven percentage points.

It is advisable to seek an amicable settle-ment based on a payment schedule drawn upby a public notary, which includes an enforce-ment clause that allows creditors, in case ofdefault by the debtor, to go directly to theenforcement stage, subject to acknowledge-ment by the court of that document’s bindingnature. Holding a debt instrument due andpayable (acknowledgement of debt, unpaidbill of exchange, dishonoured cheque, etc),creditors may obtain an injunction to pay(fizetezi meghagyas), using a pre-printedform. That speedier and less-costly summaryprocedure allows the judge – if he or sheconsiders the petition justified – to grant aninjunction without hearing the defendantenjoining him or her to pay the principal andlegal costs within 15 days of service of theruling (or within three days for an unpaidbill of exchange).

Although not mandatory, the presence of alawyer is nonetheless advisable for this typeof procedure. The advance on court fees, atthe claimant’s expense, amounts to 3 percent of the total claim.

In case of objection by the debtor, the caseis treated as a dispute and transferred toordinary proceedings. The parties will thenbe summoned to one or more hearings toplead their respective cases.

Ordinary proceedings are partly in writ-ing with the parties or their attorneys filingsubmissions accompanied by all supportingcase documents (original or certified copies)and partly oral with the litigants and their

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witnesses heard on the main hearing date.At any stage of such proceedings and wherepossible, the judge may attempt conciliationbetween the parties. It is relatively commonpractice to issue a winding up petitionagainst the debtor immediately to prompt

a speedier reaction or payment. Commercialdisputes are heard by the commercialchambers in either the local courts(Helyi Bırosag), or the regional courts (Me-gyei Bırosag), depending on the size of theclaim.


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WORLDHungary

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OPPORTUNITY SCOPE



Mn USDMn USD


Germany AustriaItaly France UK RussiaGermany China ItalyAustria

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%

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

IMPORTS by products

0

5000

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20000

25000

0

5000

10000

15000

20000

25000



Indicators Hungary Regional averageEmergingcountry average

GNP per capita (PPP dollars) 18,290 11,613 5,983GNP per capita (USD) 10,950 6859 2,313Human Development Index 0.869 0.772 0.672Wealthiest 10% share of national income 22 28 31Urban population percentage 66 62 44Percentage under 15 years old 16 20 30Number of computers per 1,000 inhabitants 146 122 50

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IcelandPopulation (inhabitants): 308,000GDP (US$ million): 16,300


RISK ASSESSMENTThe economic slowdown continued in 2007,with completion of the massive investmentsin the production of aluminium and, itscorollary, hydraulic energy. The dynamismof other demand factors partly offset, how-ever, that sharp decline in industrial invest-ment. Despite delays in the start-up of thenew foundries, aluminium exports postedgood growth. Household spending benefitedfrom a VAT reduction and strong wagegrowth attributable to the low unemploy-ment. Residential investment remained dy-namic, thanks particularly to theadvantageous financing terms available viathe government-backed Housing FinancingFund.

The slowdown will continue in 2008 underthe pressure exerted by the Central Bankthat should help relieve tensions – inflation,trade deficit, labour shortage – affecting theeconomy for several years. Despite evensubstantial wage increases, household con-sumption should decline towards year end inconjunction with a resurgence of unemploy-ment, an increase in the cost of credit (withthe 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

commercial premises will remain dynamic aswill public sector investment spurred by thefiscal surplus and the low level of publicsector debt. Exports will be up sharply withthe metallurgy factories getting up to speed.Sales of fish products will remain at a goodlevel with the declines in volume resultingfrom the lowering of quotas for cod counter-balanced by rising world prices.

The financial health of some companiescould deteriorate due to the slowdown. Com-panies with operations in the north-east willof course benefit from windfalls from the newaluminium factories. In the same way, thefish industry should be able to cope with thereduction of quotas, thanks to rising prices,by substituting other species and streamlin-ing production. Conversely, small- and me-dium-sized companies in the constructionand retail sectors located in the south-west,especially in the capital area, could suffer.With 60 per cent of corporate debt denomi-nated on average in foreign currencies andwith corporate investment having increasedsharply in recent years the exchange rateremains an uncertainty for the companiesconcerned. Fluctuations in the Icelandickrona trend, considering the significant ratedifferential with major currencies, arestrongly influenced by carry trade plays andthe international financial situation.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 2.4 7.7 7.1 4.2 2.0 0.6Consumption (var.) 6.1 6.8 13.0 4.4 3.7 −1.0Investment (var.) 26.0 34.0 60.0 20.0 −28.0 −30.0Inflation 2.1 3.2 4.0 6.8 4.9 4.2Unemployment 3.4 3.1 2.1 1.3 1.1 2.7Short-term interest 5.0 8.6 10.2 12.0 14.0 13.0Public sector balance (%GDP) −2.8 0.2 5.2 7.0 4.5 2.0Public sector debt (%GDP) 41.0 35.0 26.0 29.0 29.0 27.0Exports (var.) 1.4 8.3 7.0 −5.0 5.0 14.0Imports (var.) 10.8 14.3 29.0 10.0 −9.0 1.0Current account balance (%GDP) −5.0 −9.9 −16 −25 −18.0 −14.0


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IrelandPopulation (million inhabitants): 4.3GDP (US$ million): 220,000


RISK ASSESSMENTAffected by the decline in residential invest-ment, the economy began to slump in the2007 second half with the severity of theslowdown limited, however, by the dyna-mism of other components of growth. House-hold consumption accelerated amid abrighter employment and wage picture inboth industry and services. Many wage-earners who lost their jobs in residentialconstruction found new employment in thenon-residential segment and public works.Exports have been underpinned by the finan-cial services sector and pharmaceuticals,meanwhile corporate investment in machin-ery and equipment spurred by the strongdemand.

The slowdown will continue in 2008, witha further decline in residential investmentoffset to a lesser extent this time by growthin other sectors. Although public spendingon infrastructure (roads, railway and so on)and building should remain dynamic, corpo-rate investment, especially by subsidiaries ofAmerican companies, should be considerablyhampered by relatively weaker demand.Exports will suffer from both unfavourable

exchange rates and the slowdown in theUnited States, which represents one-fifth ofsales abroad. Consumption will slow downas well amid flagging growth of jobs andwages as well as rising unemployment exac-erbated by the growing numbers of peoplelosing their jobs in residential construction.This will ultimately tend to reduce importsand a current account deficit that will none-theless remain very large.

Payment behaviour remained satisfactoryin 2007. Accustomed to living in a stronggrowth environment, companies could, how-ever, suffer in 2008 even from a limitedeconomic slowdown. The property sector willcontinue to present much higher-than-aver-age risk. Margins will remain tight in print-ing and also in a road transport sectorhammered by rising petrol costs. Cateringwill suffer from the repercussions of anintensified campaign against driving whileunder the influence of alcohol and elsewherethe entire tourist sector may be faced with adearth of American tourists. Export sectors,especially those billing in dollars and sellingin the dollar zone, like electronics and thecomputer industry, will prefer to see theirmargins erode than to lose market share.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 4.3 4.3 5.9 5.7 4.9 2.5Consumption (var.) 3.0 4.1 7.3 5.7 6.8 3.9Investment (var.) −0.7 7.5 19.9 −6.7 16.0 4.0Inflation 4.0 2.3 2.2 2.7 3.0 2.8Unemployment 4.7 4.5 4.3 4.4 4.6 5.6Short-term interest 2.3 2.1 2.2 3.1 3.9 4.0Public sector balance (%GDP) 0.4 1.3 1.2 2.9 1.1 −0.8Public sector debt (%GDP) 31.1 29.6 27.4 25 24.0 26.0Exports (var.) 0.7 7.0 5.2 4.4 6.0 5.0Imports (var.) −1.6 8.5 7.7 4.4 5.2 4.0Current account balance (%GDP) 0.9 −0.6 −3.5 −4.5 −5.0 −4.8



■ PaymentAlthough the use of bills of exchange isuncommon in domestic commercial transac-tions between Irish companies, they aresometimes used in international trade. Thecheque, defined as ‘a bill of exchange drawnon a bank and payable on demand’, is morewidely used for commercial transactions butdoes not provide a foolproof guarantee asissuing an unfunded cheque is not a criminaloffence.

On the other hand, SWIFT bank transfers,well established in Irish banking circles, arewidely used as they are quick and efficient.Payment orders issued via the Web site ofthe client’s bank are a rapidly growinginstrument.

■ Debt collectionThe collection process usually begins withthe debtor being sent a final demand, or ‘7-day’ letter, by registered mail asking him topay the principal along with any contractu-ally agreed default interest. Where there isno specific interest clause, the rate applicableto commercial contracts concluded after 7August 2002 (Regulation number 388, 2002)is the benchmark rate, ie the EuropeanCentral Bank’s refinancing rate, in forcebefore 1 January or 1 July of each year,marked up by seven percentage points andcalculated on a daily percentage.

For claims exceeding €1,270, creditors maythreaten debtors with a statutory demandfor the winding up of their business, if theyfail to make payment or come to terms withinthree weeks after a final demand for paymentis sent to them ( a ‘ 21-day notice’). Thereafterthe debtor is regarded as insolvent (Compa-nies Act 1963, amended in 1990, section 214).

Irish law and the Irish legal system aremainly founded on British ‘common law’inherited from the past, although separatenational legislation has subsequently beendeveloped. In ordinary proceedings, creditorswho hold material evidence of their claim(contractual documents, acknowledgementof debt, unpaid bills of exchange) may seek asummary judgement from the court wheretheir claim is not contested. This allows themto obtain a writ of enforcement more quickly.If a debtor fails to respond to a civil summonsbefore the District Court or a civil bill beforethe Circuit Court, the creditor may obtain ajudgement by default based on the submis-sion of an affidavit of debt without a courthearing. An affidavit of debt is a swornstatement that substantiates the outstand-ing amount and cause of the claim. It bearsa signature attested by a notary or an Irishconsular office.

The claim amount at stake will determinethe competent court: the District Court, theCircuit Court or, for claims exceeding€38,092.14, the High Court in Dublin, whichhas unlimited jurisdiction to hear civil and

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criminal cases and to assess in the firstinstance the constitutionality of laws enactedby Parliament (Oireachtais).

The creation on 12 January 2004 of a com-mercial court – as a special High Court divi-sion – competent to hear commercialdisputesexceeding €1 million, included in a commer-cial list or cases concerning intellectual prop-erty, is intended to provide suitable andrapidexamination of the cases submitted.

When a defendant answers a summons,asserts his rights and refuses to make pay-

ment, relatively formal plenary proceedingsare instituted wherein the court gives equalimportance to the case documents submittedby the parties – with possible use of thedisclosure system in the submission of evi-dence – barrister arguments, and oral evi-dence presented at the main hearing.

For claims brought before the DistrictCourts (with under €6,348.69 at stake), thereis a simplified written procedure, but theaccent is mainly on hearing respective liti-gants’ witnesses.


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WORLDIreland

ITALY

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ItalyPopulation (million inhabitants): 59.1GDP (US$ million): 1,850,900


STRENGTHS• The excellent reputation enjoyed by

sectors like luxury, home furnishings andclothing partly offset high cost prices.

• The smaller companies that constitutesome 200 industrial districts generatestrong sector synergy.

• Italy’s exceptional attractiveness totourists allows it to withstandcompetition from new Europeandestinations.

• Labour market reform has contributed toincreasing employment and decreasingunemployment even if the employment ofwomen and seniors is still low.

• Pension reform will facilitate coping withunfavourable demographics.

WEAKNESSES• The insufficient proportion of high value-

added and technology-intensive productsundermines exports.

• The insufficiency of productivity gain isattributable to the limited meansdevoted to research and the limitedpenetration of high technologies incompanies.

• Tax evasion and the grey economy notonly fail to contribute to either publicsector financial recovery or debtrepayment, but they also increase the taxand social contributions borne byreported income.

• Administrative and legal procedures areslow.

• Subsidies have not sufficed to close thegap between the south and the rest of thecountry.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 0.1 1.2 0.1 1.9 1.8 1.4Consumption (var.) 1.0 0.7 0.6 1.5 1.8 1.5Investment (var.) -5.8 2.3 -0.8 2.3 1.9 1.9Inflation 2.8 2.3 2.1 2.2 1.8 2.1Unemployment 8.6 8.1 7.7 6.8 6 5.8Short-term interest rate 2.3 2.1 2.2 3.3 4.3 4.2Public sector balance (%GDP) -3.5 -3.5 -4.2 -4.4 -2.7 -2.8Public sector debt (%GDP) 104.3 103.8 106.2 107.0 105 103Exports (var.) -2.4 3.3 -0.5 5.3 4 3Imports (var.) 0.8 2.7 0.5 4.3 3.3 3Current account balance (%GDP) -0.9 -0.5 -1.2 -2.1 -1.8 -1.8


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RISK ASSESSMENTEconomic growth remained sluggish in 2007,despite a degree of support from consumptionand exports. Household spending, althoughstill limited by weak wage growth, increasedsomewhat, thanks increased credit recourseand a bright employmentpicture.Theerosionof export market share came to a halt, thanksto switching to higher value-added goods intraditional sectors like machinery, woodproducts, clothing, shoes and the car indus-try. 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 liabilityand youth entering the rental market andreduction of the local share of property tax)made possible by the improvement in publicfinances and the campaign against tax fraud,household consumption will slow amid aweakening job market and rising bread andgrain prices. Although the automotive indus-try will continue to perform well in Europe,other export sectors will suffer from theunfavourable exchange rates and the deteri-oration of economic conditions in the UnitedStates and Europe. Public sector investmentwill lack buoyancy while residential con-struction will decline slightly under the effectof the credit crunch. Corporate capital equip-ment purchases will increase further due tothe high capacity utilisation rates resultingfrom the lack of investment in recent years.

Despite sharp improvement since 2005,the Coface payment incident index remainswell above the European average. Initiatingcollection procedures is still a slow process.Swindles and rackets have not disappeared,particularly in south. Even if the depth of theeconomic slowdown expected this year provesto be limited, and if the income tax rateapplicable to profits eases from 33 to 27.5 percent, limited and localised deterioration ofpayment behaviour will remain possible inview of the less buoyant international envi-ronment and higher energy costs. The mar-gins of companies trading with the dollarzone will suffer from the unfavourableexchange rates. Construction material man-ufacturers (ceramic, stone, tile)willmoreoverfeel the effects of the construction downturn

in the United States. Tourism will probablyhave to contend with a reduction in revenues.Milling (flour, pasta) and biscuit making willhave to contend with the increasing cost ofagricultural raw materials. Exporters ofclothing articles and fine leather goodsshould suffer less from the consumptionslowdown across the Atlantic since they oftenfocus on high-end clientele little affected bythe economic difficulties. And home furnish-ings, like furniture and appliances, shouldcontinue to perform well in Europe, benefit-ing from dynamic renovation activity and thetime lag between construction and this typeof purchase.


■ FoodAfter the steady trend in 2007, several riskshave clouded the outlook for 2008. Exportswill begin to suffer from the unfavourableexchange rates. The rising cost of agricul-tural raw materials will affect companiesthat use and/or process them. The relativelylimited size of those companies compared totheir mass-distribution customers will makeit difficult to pass on the entire cost increasein sales prices.

■ AutomotiveFiat had a good year in 2007 as much inpassenger cars as in industrial and commer-cial vehicles. Forecasts for 2008 have beenguarded: intense competition will not facili-tate achievement of market share objectivesand the failure to renew the ‘rottamazione’car-purchase bonus could affect the market.

■ Electronics and electrical engineeringDespite good export performance, notably tocountries outside Europe, the sector suffereda slight slowdown in 2007. Rising costs andthe strong euro put pressure on corporatemargins. In less buoyant economic conditionsthis year, demand for capital goods couldmoreover weaken.

■ Mass distributionSales growth slowed in 2007 even if harddiscount chains outperformed other formats.Energy and transport costs along with in-tense competition between chains – which

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can also take the form of new services – haveaffected profitability. Although the operatorssay they are confident for 2008, the expectedeconomic slowdown and higher prices couldaffect demand.

■ FashionRelentless competition from Asian countriesnotwithstanding, the textiles/clothing sectorhas maintained the slightly upward trendthat emerged in the second half 2006, thanksto repositioning on the high-end and reloca-tion of production (but at the cost of areduction in the number of players). Perform-ance in the leather and shoe segments has,however, been less convincing despite a goodexport trend.

■ Mechanical engineeringThe sector had a good year in 2007 under-pinned again by the good performance ofmachinery for industry, textiles inparticular,in both the domestic market and abroad.Things will be more difficult in 2008 with theexpected investment slowdown.


■ PaymentTrade notes (cambiali) are available in theform of bills of exchange or promissory notes.Cambiali must be duly accepted by thedrawee and stamped locally at 12/1000 oftheir value or at 6/1000 if stamped before-hand abroad. In case of default, they consti-tute de facto enforcement orders as the courtsautomatically admit them as a writ of exe-cution (ezecuzione forzata)againstthedebtor.

Signed bills of exchange are a fairly securemeans of payment but are rarely used onaccount of the high stamp duty, the some-what lengthy cashing period and thedrawee’s fear of damage to his or her repu-tation caused by the recording and publica-tion of protested unpaid bills at theChambers of Commerce.

Since the rules on cheque amounts wererelaxed in April 1990, the cheque has expe-rienced substantial development: besides thedate and place of issue, cheques establishedin amounts exceeding 12,500 euros andintended to circulate abroad must bear the

endorsement non trasferibile (not transfera-ble) since they can only be cashed by thebeneficiary.

To make the use of cheques more secureand efficient, the new banking provisionsreaffirm that, since 1 September 2006, anybank or postal cheque issued without author-isation or with insufficient funds will subjectthe cheque drawer to administrative penal-ties and listing by the CAI (Centraled’Allarme Interbancaria), which automati-cally results in exclusion from the paymentsystem for at least six months.

Bank vouchers (ricevuta bancaria) are nota means of payment, but merely a notice ofbank domicile drawn up by the creditor andsubmitted by him or her to his or her ownbank for presentation to the debtor’s bankfor the purposes of payment (the vouchersare also available in electronic form, in whichcase they are known as RI.BA elettronica).Courts may accept bank vouchers, if signedby the buyer, as acknowledgement of debt.However, they do not have the force of a writof execution.

Bank transfers are widely used (90 percent of payments from Italy are made bybank transfer), and in particular SWIFTtransfers, as they are considerably fasterthan ordinary transfers. The bank transferis a cheap and secure means of payment oncethe contracting parties have establishedmutual trust.

■ Debt collectionAs elsewhere, an out-of-court settlement isalways preferable to legal action. Demandsand telephone dunning are quite effective, asare onsite visits that provide an opportunityto restore dialogue between supplier andcustomer, and so to conclude a settlement.

Settlement negotiations focus on paymentof the principal, plus any contractual defaultinterest as may be provided for in writingand accepted by the buyer. Where there is nosuch agreement, the rate applicable to com-mercial agreements concluded after 8 August2002 (Decree-Law of 9 October 2002) is thesix-monthly rate set by the Ministry ofEconomic Affairs and Finance by referenceto the European Central Bank’s refinancingrate, increased by seven percentage points.

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Failing an out-of-court settlement with thecustomer, the type of legal action taken willdepend on the type of documents justifyingthe claim.

Based on cambiali notes – bills of exchange,promissory notes – or cheques, creditors mayproceed directly with forced execution begin-ning with a demand for payment (atto diprecetto) served by a bailiff preliminary toattachment of the debtor’s moveable andimmoveable property barring receipt of ac-tual payment within the allotted time. Theresulting auction proceeds will be used todischarge outstanding claims.

Creditors can obtain an injunction to pay(decreto ingiuntivo) viaa fast-trackprocedureif they can produce, besides invoice copies,

written proof of the claim’s existence. Theinjunction issued by the court will alsospecifythe amount of legal costs, according to anestablished schedule, payable by the debtor.

Lacking the requisite supporting docu-ments, a creditor must take ordinary legalaction to establish his or her right to pay-ment, a process still considered slow despitethe civil procedure reform adopted in May1995. Such proceedings can take up to twoyears, although the applicant may obtain,during that period, a provisional paymentorder equivalent to a writ of execution. Arecent amendment to the civil code, effectivesince March 2006, is intended, however, tospeed up the pace of proceedings by imposingstrict time limits on the parties for submit-ting evidence and making their case.


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WORLDItaly

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KazakhstanPopulation (million inhabitants) 15.3GDP (US$ million) 77,237

Country @rating: BMedium-term rating: Moderately high riskBusiness climate rating: B

STRENGTHS• Kazakhstan not only boasts the world’s

eighth largest oil and second largesturanium reserves but is also endowedwith a wealth of other natural resourceslike gas and iron.

• Large investments in oil extraction andtransport should result in a threefoldincrease in exports.

• The oil fund should wall off the fiscalbudget from oil price and the publicsector has little debt.

• A consensus on opening the country toforeign capital and balanced policy onethnic minorities have resulted in a levelof political risk that is more moderatethan in other Central Asian countries.

WEAKNESSES• External debt ratios have deteriorated

sharply, due to the growth of privatesector debt.

• The credit explosion has weakened thebanking sector.

• Uncertainty over the process ofsuccession to President Nazarbaev canbe a source of instability and deterforeign investment.

• A lack of transparency and a high level ofcorruption are major elements ofweakness.

RISK ASSESSMENTThe growth rate exceeded 9 per cent in 2007,for the eighth consecutive year. The economywas driven not only by increased productionof oil in both value and volume terms butalso of iron, uranium and other types of ore.

The outlook for 2008 is dimmer since thecountry will suffer from a stiffening of creditconditions in the wake of the subprime crisiswith Kazakh banks having taken on heavydebt abroad to fund the rapid growth oflending to the private sector. A significantproportion went into property and as much35 per cent into consumption.

The bursting of the property bubble andthe stiffening of credit conditions couldweaken the financial and construction sec-

tors and consumption could slow signifi-cantly. A large-scale financial crisis will,nonetheless, be unlikely to develop with thegovernment, whose solvency is very good,able to intervene in any systemic crisis. Theeconomy should, moreover, continue to ben-efit from support in 2008 from rising hydro-carbon, ore and grain sales. GDP growthcould thus come to around 6 per cent in 2008,a nonetheless substantial decline comparedto performance these past nine years. Fur-ther out, the threefold increase in oil produc-tion resulting from exploitation of theKashagan field will spur growth. The severetensions between the consortium headed byTechnip and government officials, and tech-nical difficulties encountered, should ulti-mately be resolved.

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USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 9.3 9.6 9.7 10.6 9.6 6.3Inflation (%) 6.5 6.9 7.6 8.6 10.6 14.8Public sector balance (%GDP) −0.9 −0.2 0.6 0.8 −0.8 −1.7Exports 13.2 20.6 28.3 38.8 44.8 51.2Imports 9.6 13.8 18.0 24.1 30.1 35.1Trade balance 3.6 6.8 10.3 14.7 14.7 16.1Current account balance −0.3 0.5 −0.5 −1.8 −4.9 −6.9Current account balance (%GDP) −1.0 1.2 −0.9 −2.2 −4.8 −5.3Foreign debt (%GDP) 74.0 75.9 76.0 91.4 101.2 93.0Debt service (%Exports) 33.8 36.5 41.1 31.6 42.8 55.2Foreign exchange reserves (in months of imports) 2.4 2.6 3.4 3.9 4.6 5.7



■ Market overviewKazakhstan is going ahead, at its own pace,with reforms designed to list it, in the wordsof its head of state, ‘among the world’s top 50economies by 2030’. A candidate for WTOaccession, the country is confronted withcorruption, bureaucracy, an inefficient taxsystem and social cleavages exacerbated bythe economic boom. Privatisation of state-owned enterprises, albeit rushed from thevery outset and incomplete, adoption ofliberal legislation and soaring foreign directinvestment (over US$46 billion net stocks atthe end of 2006) reflect the scale of progressachieved. An emerging economy highlyprized by international financiers, Kazakhs-tan’s banking sector has racked up hugeforeign borrowings and made loans to theconstruction sector that could backfire in theevent of a correction. However, the govern-ment is keeping a watchful eye and hasdecided to create emergency funds in case ofneed.

■ Means of accessWhile recognised as a market economy bythe United States in 2002 but not by theEuropean Union, the market is only mildlyprotectionist. Landlocked Kazakhstan is firstand foremost a market for seasoned export-ers. With a view to WTO accession, currentlyunder negotiation, customs duties in the non-

farm sector average around 8.2 per cent.Tariff peaks persist in sensitive sectors suchas steel (15.2 per cent), toys (15.3 per cent)and furniture (10.2 per cent). Customs clear-ance continues to be stifled by red tape. Anumber of products are also subject tocertification. The fact that certificates fromnon-CIS countries are not valid in Kazakhs-tan significantly slows import formalities.The government has undertaken to eradicateillegal practices, but much remains to bedone in an entire economy driven by a get-rich-quick approach.

■ Attitude towards foreign investorsKazakhstan still has the second biggestvolume of foreign direct investment in theCIS, after Russia. Foreign investor interestis driven by the country’s oil and gas reservesand its undeniable political stability. A newlaw passed in January 2003 strengthens thegovernment’s interventionist powers duringa downturn. Higher oil taxes were introducedin early 2004, but slightly eased in 2005.Furthermore, retroactive legislation waspassed in early 2005 granting the state apre-emptive right to mine ore. Due to thesustained improvement in the country’s eco-nomic situation and soaring commodityprices, relations between the governmentand foreign investors are occasionally ‘re-balanced’ in favour of domestic interests,whether public or quasi-public. The private

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sector, in particular retailing, is flourishingon the back of more than five years of robusteconomic growth. However, experience

shows that investors would do well to takeevery legal precaution before entering into ajoint venture agreement with local partners.

OPPORTUNITY SCOPE



Mn USDMn USD


Germany ChinaRussia Italy France ChinaRussia Germany UkraineFrance

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

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

IMPORTS by products

0500

1000150020002500300035004000

0

2000

4000

6000

8000

10000



Indicators KazakhstanRegional averageCIS

Emergingcountry average

GNP per capita (PPP dollars) 7,780 8,612 5,983GNP per capita (USD) 3,790 3,821 2,313Human Development Index 0.774 0.771 0.672Wealthiest 10% share of national income 26 28 31Urban population percentage 57 64 44Percentage under 15 years old 23 19 30Number of computers per 1,000 inhabitants n/a 72 50

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KyrgyzstanPopulation (million inhabitants): 5.2GDP (US$ million): 2,694


RISK ASSESSMENTEconomic growth accelerated in 2007 (up 7.5per cent), underpinned by the dynamism ofconstruction and services and spurred byhigh prices for gold, the country’s numberone export. Remittances of wages from ex-patriate workers in Russia and Kazakhstanhave also bolstered consumption. Strongdomestic demand and especially the sharpincreases in wheat prices have, however,caused a resurgence of inflation that reached8 per cent in 2007. Even more troubling, thestrong domestic demand in conjunction withrising hydrocarbon prices contributed to awidening of the current account deficit,whichrepresented about 18 per cent of GDP in2007 compared to 6.6 per cent in 2006.

The high gold prices and expatriate workerremittances should allow the economy togrow in 2008 at a rate near that registeredin 2007. This rate will be hard to sustainover the long haul, however, due to theimbalances it causes. With the formal sector,outside the gold mines, not very developed,the growth has moreover not benefited mostof the population and the political and socialsituation has remained very tense nearlythree years after the Tulip Revolution. TheDecember 2007 legislative elections, despitethe victory of President Kurmanbek Bakiev’sparty, will be unlikely to bring the necessarypolitical stability, with the continued ten-sions within the political class compoundedby a profound north–south geographiccleavage.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.0 7.0 −0.2 2.7 7.5 7.0Inflation (%) 3.1 4.1 4.3 5.6 8.0 7.0Public sector balance (%GDP) −4.9 −4.4 −3.7 −2.1 −2.2 −2Exports 590 733 794 1,011 1,379 1,705Imports 724 904 1,106 1,792 2,792 3,085Trade balance −134 −171 −312 −781 −1,413 −1,380Current account balance (%GDP) −3.0 −3.4 3.2 −6.6 −17.9 −15.1Foreign debt (%GDP) 95.1 88.2 78.0 70.2 57.7 50.5Debt service (%Exports) 8.0 6.4 7.4 5.6 5.9 5.3Foreign exchange reserves (in months ofimports)

4.6 5.3 5.0 4.3 3.7 3.8


LATVIA

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LatviaPopulation (million inhabitants): 2.3GDP (US$ million): 20,116


STRENGTHS• As a result of strong growth, the rate of

increase of per capita income has beenamong the highest of new EU memberstates.

• Commercial and financial services –particularly transport andtelecommunications – have capitalisedon Latvia’s geographic position as anEast–West trading hub.

• Fiscal prudence has made it possible tokeep public sector debt at a low level.

• Foreign exchange reserves cover themonetary base.

• The banking sector benefits from thestrong presence of foreign banks in itsownership structure.

WEAKNESSES• Overheating has weakened the economy

increasing its vulnerability to a currencycrisis or a sharp economic slowdown.

• The dynamism of domestic demand andthe limited added value of a highproportion of exports (wood products,metals) have resulted in a substantialwidening of external account deficits, ofwhich FDI covers just a small fraction.Recourse to borrowing abroad will benecessary.

• Inflation has increased sharply, whichhas delayed Latvia’s integration into theeuro zone.

• A very rapid credit expansion focusedmainly on financing property with highproportion denominated in foreigncurrencies has weakened the bankingsector.

• The labour market has become tight.

RISK ASSESSMENTEconomic growth was strong for most of2007, driven by the increase in real wagesand the expansion of credit. Consumptionshowed signs of slowing down late in the yearwhile a correction had developed in theproperty market by summer. The govern-ment’s action plan for cooling off the economywas a contributing factor. A slowdown hasdeveloped in new property loans while retailsales have begun to sag. More moderate GDPgrowth is thus expected in 2008. Householdswill continue to cut back on consumptionreflecting the negative wealth effect andrising debt service on their debt. Residential

investment will stall. Continuation of publicinvestment projects should, however, limitthe extent of the growth slowdown.

The easing of inflationary pressures willbe a slow process due to increases in food andimported gas prices and regulated prices.Adoption of the euro is thus not expectedbefore 2011. A severe foreigntrade imbalancewill moreover persist due to the offsettingeffects of the slowdown of foreign demandand the cooling off of domestic demand. Theincrease in investment income paymentsshould also fuel a current account deficit thatwill continue to represent nearly 20 per centof GDP. In this context, foreign debt, due

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mainly by banks, should remain at a highlevel.

Although the risks of a currency crisis andan economic trend reversal have increased,a soft-landing scenario remains the mostlikely outcome. Sovereign risk, meanwhile,has been very limited with the country

maintaining prudent fiscal policy and bene-fiting from a public sector debt ratio amongthe lowest in the EU. Corruption scandalsmay cause some political instability butshould not jeopardise the current economicpolicy options.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.2 8.7 10.6 11.9 10.7 7.5Inflation (%) 2.9 6.2 6.7 6.5 10.1 8.5Public sector balance (%GDP) −1.6 −1.0 −0.4 −0.3 0.9 0.8Unemployment (%) 10.5 10.4 8.9 6.8 5.8 5.5Exports 3,171 4,221 5,361 6,140 7,663 8,789Imports 5,173 7,002 8,379 11,271 13,868 15,192Trade balance −2,002 −2,781 −3,018 −5,131 −6,205 −6,403Current account balance −920 −1,761 −1,991 −4,518 −5,897 −6,385Current account balance (%GDP) −8.2 −12.8 −12.4 −22.5 −22.2 −19.4Foreign debt (%GDP) 84.0 97.7 94.7 118.2 111.3 104.4Debt service (%Exports) 15.0 17.0 30.3 18.5 19.9 20.3Foreign exchange reserves(in months ofimports)

2.6 2.6 2.5 3.5 3.4 3.3



■ Market overviewSince the accession of Romania and Bulgariain 2007, Latvia, with its population of 2.3million, is no longer the poorest country inthe enlarged EU. It has even beaten Polandwith per capita GDP at 53.4 per cent of theEU average. The country is developing fastwith 11 per cent growth in the first half of2007, albeit accompanied by strong inflationand a current account deficit.

■ Means of entryThe Latvian market is open and highlycompetitive and there are no particularprotectionist measures to note. A WTO mem-ber since February 1999, Latvia is one of 10new members that joined the EU on 1 May2004 and so applies the Common ExternalTariff. Such import prohibitions as exist arecommon to all member countries. The coun-try’s intellectual property laws are still ashade unsatisfactory.

■ Attitude towards foreign investorshe country is open to foreign investors.Since 2004, Latvia has one of the lowestrates of corporation tax in the enlarged EU(15 per cent, compared with 19 per centin 2003, 22 per cent in 2002 and 25 percent in 2001). The new Labour Code,adopted in 2002, is in line with Europeandirectives. Social security contributions ingeneral amount to 33.09 per cent of wages,with 24.09 per cent borne by the employerand 9 per cent by the employee.

■ Foreign exchange regulationsFollowing the pegging of the lat to the euroon 1 January 2005 and entry into ERM II on29 April 2005, the central rate of LVL0.7028to the euro remains unchanged. The Latviancentral bank has decided to narrow the lat’sfluctuation band against the euro from ±15to ±1 per cent of the central rate. Henceforth,the currency’s exchange rate shouldfluctuatebetween LVL0.695776 and LVL0.709832 tothe euro.

In early 2007, the Latvian currency was

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hit by the worsening economic situation. InFebruary, the lats neared the upper limit ofits fluctuation band versus the euro and hadto be defended repeatedly by the centralbank, which spent €330 million in March2007 to maintain the exchange rate. Eventhough this trend was later reversed as latsreserves were rebuilt following a period ofinverse speculation, the central bank’s keyinterest rates will remain consistently highand lead to a partial shortage of lats on thecurrency market. The lats peg to the euro

within a 1 per cent fluctuation band remainopen to debate. However, the reappointmenton 1 November of Ilmars Rimsevics – theself-styled guarantor of the Latvian cur-rency’s stability – as governor of the Bank ofLatvia for a six-year term confirms thegovernment’s opposition to any devaluation.

EMU entry, originally scheduled for 1January 2008, will have to be pushed back to2013 at the earliest due to extremely highinflation, the only criterion hampering Lat-via’s entry into the euro zone.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMANDS (%GDP + IMPORTS)


Mn USDMn USD


Lithuania RussiaEstonia Germany UK LithuaniaGermany Russia PolandEstonia

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

■ 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%

IMPORTS by products

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0

500

1000

1500

2000



Indicators Latvia Regional averageEmergingcountry average

GNP per capita (PPP dollars) 15,350 11,613 5,983GNP per capita (USD) 8,100 6,859 2,313Human Development Index 0.845 0.772 0.672Wealthiest 10% share of national income 29 28 31Urban population % 68 62 44Percentage under 15 years old 15 20 30Number of computers per 1,000 inhabitants 217 122 50

LITHUANIA

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LithuaniaPopulation (million inhabitants): 3.4GDP (US$ million): 29,791


STRENGTHS• The country has rapidly modernised its

economy and has proven capable ofmeeting the challenges of integrationinto the EU. Per capita income has beenrising sharply in conjunction with amarked decline in unemployment.

• Lithuania boasts a skilled workforce, aconstantly improving institutionalenvironment and a favourablegeographic 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 remainregarding the entry into the euro zone.

• Labour shortages exacerbated byemigration have pushed the cost oflabour higher and underminedcompetitiveness.

• Foreign direct investment has covered alimited proportion of the current accountdeficit while the growth of private foreigndebt has been substantial.

• An excessively rapid credit expansion,particularly property and foreign-currency loans, will bear watching.

RISK ASSESSMENTInvestment, especially in construction andproperty, and consumption, buoyed by theincrease in household income, fuelled stronggrowth in 2007. Economic overheating, risingenergy and food prices and increases incertain taxes resulted, however, in a markedsurge of inflation. External account deficitswidened amid strong domestic demand anda reduction in refining capacity due to firedamage and closure of the Mazeikiu refineryfor modernisation.

With interest rates higher, credit shouldease in 2008. Investment should, however,benefit from the infrastructure projects un-dertaken with consumption remaining dy-namic due to wage growth and a furtherreduction of income tax. A new increase inexcise taxes and the price of Russian gas

should stoke inflation. Already turned downin 2007 for excessive inflation, Lithuania willbe unlikely to join the euro zone before 2011.The current account deficit will remain highdespite the reopening of the refinery andincreases in both remittances from expatri-ate workers and transfers from the EU.Foreign debt, especially bank debt, shouldcontinue to grow. All this deterioration hasbeen partly offset by the pursuit of prudentfiscal policy and the low level of public sectordebt. The banking sector, moreover, hasgreat staying power.

Although the minority coalition in powerhas remained shaky, it should be able towithstand challenges until the next legisla-tive elections, scheduled in October 2008.Relations with Russia have been tense sincethe interruption of oil deliveries to theMazeikiu refinery in July 2006.

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USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 10.3 7.3 7.9 7.7 8.5 7.5Inflation (%) −1.1 1.2 2.7 3.8 5.6 6.5Public sector balance (%GDP) −1.3 −1.5 −0.5 −0.6 −0.9 −1.4Unemployment 12.4 11.4 8.3 5.6 4.2 4.2Exports 7,658 9,306 11,774 14,152 16,487 19,520Imports 9,362 11,689 14,690 18,361 22,548 26,945Trade balance −1,704 −2,383 −2,916 −4,210 −6,061 −7,424Current account balance −1,278 −1,725 −1,831 −3,218 −5,155 −6,405Current account balance (%GDP) −6.9 −7.7 −7.1 −10.8 −14.2 −14.6Foreign debt (%GDP) 44.9 46.5 48.8 63.7 65.8 64.4Debt service (%Exports) 15.8 13.9 15.4 15.1 15.7 15.3Foreign exchange reserves (in months ofimports)

3.6 3.0 2.5 3.0 3.2 3.0



■ Market overviewThe country continues to post strong eco-nomic growth for the sixth year in successionand is one of the most vibrant economies ofthe 27-member EU. Initial results for 2007also point to a robust performance. Thecountry’s robust growth is due partly tostrong domestic demand driven by risingwages and incomes and soaring bank loans,and partly to buoyant investment boosted byEuropean funding.

■ Means of entrySince EU accession on 1 May 2004, Lithuaniahas been a member of the European singlemarket. It is now an open and competitivemarket; in fact it is one of the most competi-tive and dynamic markets of the 27-memberEU. As for the country’s legal system, EUdirectives and regulations are transposedand applied to local law. Lithuania leads the27-member states in this field.

Excise duties and levies apply to a merehandful of products, including alcoholic bev-erages and oil. Some products may be im-ported only by licence holders. Licences areno longer difficult to obtain, even for alcoholicbeverages. For settlements, bank transfersand short-term credit are increasingly used

and have all but replaced pre-payment anddocumentary credit.

■ Attitude towards foreign investorsA sound economy and an improved businessenvironment have contributed to attractinga growing number of foreign investors. FDIhas steadily risen over the last 10 years to arecord €1.41 billion at end-2006 (5.9 per centof GDP), compared with €807.6 million in2005 and €623 million in 2004.

Lithuania is attractive to foreign investorsfor many good reasons: favourable tax laws(15 per cent corporation tax); free and unres-tricted repatriation of profits, income anddividends derived from one’s activity; highlyskilled workforce; low (though rapidly rising)wage costs and no discrimination againstforeign investors.

■ Foreign exchange regulationsThe Lithuanian currency, the litas, has beentied to the euro at a fixed rate(€1 = LTL3.4528) since 1 February 2002.Numerous Lithuanian firms already holdeuro-denominated accounts. Lithuania en-tered ERM II in June 2004.

However, its entry into the euro zone,initially scheduled for early 2007, could bepushed back to 2011 at the earliest due tothe government’s inability to contain thealarming rise in inflation.

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OPPORTUNITY SCOPE



Mn USDMn USD


Russia GermanyLatvia Estonia Poland GermanyRussia Poland NetherlandsLatvia

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

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

IMPORTS by products

0

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2000

3000

4000

5000



Indicators Lithuania Regional averageEmergingcountry average


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84

LuxembourgPopulation (inhabitants): 462,042GDP (US$ million): 41,382


RISK ASSESSMENTDespite a slight slowdown, economic growthremained very strong in 2007. Financialservices, which represent 40 per cent ofdomestic product and 30 per cent of taxrevenues, have made a substantial contribu-tion to GDP growth and the current accountsurplus through management commissionsreceived by Undertakings for Collective In-vestment (UCI). The good conditions prevail-ing in steel have moreover made it possibleto reduce the manufacturing trade deficit.

The slowdown will continue in 2008. Thefinancial crisis will undercut the financialperformance of banks. The reduction of UCInet assets will undermine commissions. Theloss of dynamism should remain limited,however, with the specialities of choice in theLuxembourg financial centre – private bank-ing and UCI management – affected lessthan investment banking. Consumptionshould prove more dynamic moreover due torising civil service wages, the adoption of tax

incentives and bright job picture in servicesno longer benefiting only non-residents (one-third of the working population). The othercomponents of growth, investments and ex-ports, should remain buoyant despite aresidential property slowdown and less fa-vourable external conditions.

The corporate financial situation has re-mained good. Despite the upward economictrend, bankruptcies began to increase again,up 13 per cent from January throughSeptem-ber 2007. A high proportion of the bankrupt-cies concern long-established companies,with a failure to deal with succession prob-lems probably responsible for many of them.Difficulties inobtainingbusinessinformationhave not improved matters, a fact underlyingthe Coface business climate rating for Lux-embourg. At the sectoral level, services toprivate individuals are still the most vulner-able. Residential construction and servicesto the financial sector could also becomeshakier in coming months.

LUXEMBOURG

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 2.0 4.9 5.0 6.1 5.4 4.5Consumption (var.) 1.0 2.1 3.7 2.0 2.1 3.2Investment (var.) −12.7 18.6 −1.1 4.9 4.7 8.5Inflation 2.5 3.2 3.8 3.0 2.4 2.7Unemployment 3.7 5.1 4.5 4.7 4.6 4.5Short-term interest 2.3 2.1 2.2 3.1 4.3 4.3Public sector balance (%GDP) 0.5 −1.1 −0.1 0.7 1.1 0.9Public sector debt (%GDP) 6.3 6.4 6.1 6.6 6.9 6.0Exports (var.) 5.0 9.8 6.3 9.6 7.5 7.2Imports (var.) 6.1 9.8 6.1 7.2 7.7 7.4Current account balance (%GDP) 8.0 11.8 10.9 10.3 11.5 12.7


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MacedoniaPopulation (million inhabitants): 2.0GDP (US$ million): 6,217


RISK ASSESSMENTEconomic growth accelerated in 2007, drivenby exports, the financial sector and construc-tion. Consumption and especially investmentstrengthened, buoyed by the introduction ofa unified tax system in conjunction with areduction in bureaucracy. The confidence ofeconomic agents should remain high in 2008with buoyant domestic demand offsettingweaker foreign demand.

The denar’s de facto euro peg has contrib-uted to limiting inflationary pressures, andfiscal and monetary policy management hasremained prudent. The good export perform-ance and the influx of remittances fromexpatriate workers facilitatedbringingexter-nal accounts into balance. Amid profit repa-triations by a major foreign investor, thedynamism of domestic demand, and theupsurge in energy prices, a moderate currentaccount deficit should re-emerge in 2008.

Greater economic stability notwithstand-ing, the structural weaknesses have not

disappeared, with exports still too centred onmetals and clothing, the institutional andregulatory framework still undermined bypersistent deficiencies, the pace of industrialrestructuring and labour market reform stilllagging and unemployment still very high.

Although enjoying an absolute parliamen-tary majority, the government has beendependent on the backing of an ethnicAlbanian opposition party to implement themore sensitive reforms – according to the2001 Ohrid Agreement, such reforms requirethe approval of a majority of deputies belong-ing to ethnic minorities. But continuingantagonism between the government and theopposition has slowed the legislative process,delaying Macedonia’s integration into theEU in consequence. The country is currentlyimplementing a stabilisation and associationagreement. Domestic security, meanwhile,could deteriorate in case of instability inKosovo.

MACEDONIA

87

1


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.8 4.1 4.1 3.1 4.6 4.7Inflation (%) 1.2 -0.4 0.5 3.2 2.1 2.7Public sector balance (%GDP) -1.1 0.0 0.2 -0.6 -0.9 -1.5Exports 1,363 1,672 2,040 2,396 2,990 3,507Imports 2,211 2,785 3,097 3,682 4,397 5,139Trade balance -848 -1,112 -1,058 -1,285 -1,407 -1,632Current account balance (%GDP) -3.2 -7.7 -1.4 -0.4 0.5 -2.8Foreign debt (%GDP) 38.1 38.7 43.7 40.9 40.3 39.8Debt service (%Exports) 16.4 10.3 8.9 13.2 12.1 10.9Foreign exchange reserves (in months ofimports)

4.1 3.2 3.9 4.8 4.4 4.0


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MaltaPopulation (inhabitants): 404,989GDP (US$ million): 6,331


RISK ASSESSMENTThe economic recovery continued in 2007,driven not only by public investment but alsoby private consumption spurred by risingdisposable incomes, credit expansion and thedecline of hoarding linked to the country’sadmission to the euro zone in January 2008.Only a very marginal growth slowdownshould develop in 2008 due to completion theprevious year of construction of the newgeneral hospital and the waning effect of taxreductions.

Accordance for Malta’s, admission to theeuro zone constitutes recognition of its goodmanagement of the economy. The pressureon prices has been limited despite risingworld energy prices. The government has

reduced the fiscal deficit to a level well belowthe threshold stipulated in the MaastrichtTreaty.

Additional measures of consolidation willnonetheless be necessary to improve thelong-term sustainability of public sector fi-nances and further reduce a governmentdebt burden still exceeding 60 per cent ofGDP. Malta’s small, very open and highlyspecialised economy – with tourism andelectronics generating more than one-thirdof GDP and half of exports – remains,moreover, vulnerable to external shocks. Asubstantial current account deficit has per-sisted in a context of weak competitivenessand an overvalued exchange rate. The highconcentration of bank loans in the propertysector will bear close watching by officials.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) −0.3 0.1 3.3 3.3 3.2 2.8Inflation (%) 1.9 2.7 2.5 2.6 0.9 1.9Public sector balance (%GDP) −9.8 −4.9 −3.0 −2.4 −1.9 −1.7Exports 2,592 2,721 2,557 2,909 3,281 3,656Imports 3,232 3,597 3,683 4,130 4,654 5,220Trade balance −640 −876 −1,127 −1,222 −1,373 −1,564Current account balance (%GDP) −3.1 −6.3 −9.1 −6.5 −9.2 −8.0Foreign debt (%GDP) 41.8 51.1 52.7 49.7 45.8 43.5Debt service (%Exports) 2.8 2.9 3.9 3.5 3.1 2.9Foreign exchange reserves (in months ofimports)

6.5 5.8 4.9 4.7 4.3 3.8


MOLDOVA

89

1

MoldovaPopulation (million inhabitants): 3.8GDP (US$ million): 3,266


RISK ASSESSMENTStrong investment and private consumptionmore than offset the negative impact of thedrought on the farm and food sectors in 2007.Robust domestic demand and the lifting end2007 of trade restrictions imposed by Russiaon the sale of wine, a primary source ofrevenue for Moldova, should boost growth in2008.

Despite the recovery of wine exports toRussia and the extension in 2008 of autono-mous trade preferences by the EU, Moldovashould continue to run a substantial tradedeficit representing nearly 50 per cent ofGDP due to the strong demand for consumergoods and the rising cost of energy spurrednotably by the gradual raising of the pricesfor imported Russian gas. Althoughincreasesin expatriate worker remittances and inter-national financial aid should partly offsetthat deficit, the current account deficit willremain high.

The limited diversification of both the

economy and exports (centred on food prod-ucts, vegetable products and textiles) alongwith the country’s great dependency onRussia continue to cloud the growth outlook.There is still widespread poverty despitecontinuing wage growth.

Divisions within Communist Party inpower and tensions with the opposition couldgrow in the run-up to the legislative andpresidential elections scheduled in the 2009first half. The government will nonethelesshave to proceed with implementation of theaction plan negotiated with the EU especiallyas regards media freedom, anti-corruptionmeasures, judicial reform and the businessenvironment. Government officials havebeen moving closer to Moscow again and, inthe conflict with Transnistria, although theMoldovan president and the officials repre-senting the secessionist region have appar-ently adopted more flexible positions, aresolution of the conflict is not yet on thehorizon.

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USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.6 7.4 7.5 4.0 6.0 6.3Inflation (%) 11.7 12.5 11.9 12.7 12.5 12.8Public sector balance (%GDP) 0.2 0.8 1.3 0.3 −0.5 −0.5Exports 805 994 1,105 1,054 1,430 1,670Imports 1,428 1,748 2,296 2,644 3,590 4,150Trade balance −623 −754 −1,192 −1,591 −2,160 −2,480Current account balance (%GDP) −6.8 −2.3 −8.8 −12.0 −13.2 −10.5Foreign debt (%GDP) 88.7 63.8 53.4 53.3 49.6 47.1Debt service (%Exports) 12.3 13.0 12.0 8.4 6.1 5.8Foreign exchange reserves (in months ofimports)

2.0 2.5 2.5 2.8 2.9 3.2


MONTENEGRO

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MontenegroPopulation: 606,000GDP (US$ million): 2,347

Country @rating: CMedium-term rating: Very high riskBusiness climate rating: C

RISK ASSESSMENTServices, which generate nearly 60 per centof GDP, drove growth in 2007 and remainthe economic engine for 2008. Recent in-vestments in the tourist sector have begunto produce results while the influx of FDIhas spurred activity in the property sector.Financial services have experienced stronggrowth with the expansion of credit buoyingconsumption. Along with increases in en-ergy prices and the minimum wage whichcontributed to the growth of inflation in2007. The use of the euro as the nationalcurrency in conjunction with prudent fiscalpolicy has, however, limited inflationarypressures.

The rapid credit expansion, compoundedby the upsurge in imports of equipment andconstruction products accompanying the in-flux of FDI, has caused external accounts todeteriorate sharply since 2006. Invisibles,

including tourism, have only offset a smallpart of the trade deficit.

The country continues to suffer from anumber of structural weaknesses: exportsstill lack diversification (with aluminium,steel and fuels representing 70 per cent oftotal sales abroad), major bottlenecks persistin the energy sector, the business climateremains difficult and the employment mar-ket lacks flexibility.

The social democratic coalition governmentwon adoption by Parliament in October 2007,nearly a year and a half after the country pro-claimed its independence, a constitutionlargely inspired by European principles. Thecountry concluded a stabilisation and associ-ation agreement the same month. Integrationinto the EU nonetheless seems a remote pros-pect due notably to the inadequacyof efforts tocombat corruption and organised crime andmodernise the civil service.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.4 4.2 4.0 6.5 6.5 6.0Inflation (%) 7.9 3.3 3.4 2.1 3.5 3.0Public sector balance (%GDP) -5.4 -2.7 -1.6 1.3 0.5 1.5Exports 306 562 574 646 841 1071Imports 712 1,080 1,214 1,783 2,378 2,903Trade balance -406 -518 -640 -1,137 -1,538 -1,832Current account balance (%GDP) -7.3 -7.7 -8.8 -29.4 -32.2 -31.6Foreign debt (%GDP) 33.2 31.2 29.6 26.1 24.9 25.2Debt service (%Exports) n/a n/a n/a n/a n/a n/aForeign exchange reserves (in months ofimports)

0.9 0.8 1.7 2.4 3.2 3.3


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The NetherlandsPopulation (million inhabitants): 16.4GDP (US$ million): 670,300


RISK ASSESSMENTThe economy continued to expand stronglyin 2007, driven by exports and domesticdemand. Despite the production slowdownaffecting gas products early in the year,exports continued to grow buoyed by re-export activity, representing about 50 percent of the total and chemical industryperformance. A dynamic job market spurredhousehold spending. Companies continuedto invest meanwhile albeit at a more moder-ate pace. With less-than-expected growth ofroyalties from natural gas exploitation, how-ever, the public sector ran another budgetdeficit.

Although the same economic engines willdrive growth in 2008, most will be lessbuoyant. Moderating demand from the mainEuropean trading partners, particularlyGer-many and the United Kingdom, will limitexport growth. The current account balancewill nonetheless continue to show a largesurplus. Increased taxes and social securitycontributions, high interest rates and anupsurge in inflation will undermine house-hold spending. This negative impact willnonetheless be partially offset by the pres-sures buffeting the job market with unem-

ployment declining to record lows and alabour shortage driving wages higher. Com-panies, meanwhile, will slow the pace of theirinvestments in view of the more difficultconditions of access to credit and the deter-rent effect of higher labour costs. The newtax and social measures included in the 2008budget in conjunction with the growth ofrevenues from natural gas exploitation willallow the government to run a slight surplusthat will help fund spending on health,pensions and education and repayment ofpublic debt.

Bankruptcies continued to decline in 2007,down 23.3 per cent over the first ninemonths,a positive trend reflected by the Cofacepayment incident index, which has remainedbelow the world average. The world demandslowdown could weaken the less robustcompanies in the very export-dependentmanufacturing sector. The scarcity of skilledlabour will moreover have a greater effect onlabour-intensive companies and those rely-ing labour with cutting-edge skills. Despitean increase in corporate tax, which nonethe-less spared smaller companies, corporatefinancial health should remain good overallin 2008.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 0.3 2.2 1.5 3.0 2.7 2.4Consumption (var.) −0.2 1.0 0.7 2.7* 2.3 1.9Investment (var.) −1.5 −1.6 3.0 7.2 4.4 3.4Inflation 2.1 1.2 1.7 1.4 1.7 2.3Unemployment 4.0 4.6 4.7 3.9 3.0 2.7Short-term interest 2.3 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) −3.2 −1.8 −0.5 0.6 −0.6 0.5Public sector debt (%GDP) 51.9 52.4 52.3 47.9 46.8 44.8Exports (var.) 2.0 7.9 5.9 7.0 6.3 5.5Imports (var.) 2.0 5.7 5.5 8.1 6.7 5.6Current account balance (%GDP) 2.8 3.3 7.1 7.6 6.9 7.5

e = estimate, f = forecast*Rate adjusted for reallocation of health spending in national accounts from private to public consumption (1 January2006 health insurance reform).


■ PaymentBills of exchange are rarely used in theNetherlands because it is not standard busi-ness practice to do so. As in Germany, theysignal mistrust on the part of the supplierand so are incompatible with the climate oftrust needed to maintain a stable businessrelationship.

Cheques too are little used. They are anunreliable means of payment as they can becashed only if covered. Consequently, issuingan uncovered cheque is not a criminal offenceand those on the receiving end of a bouncedcheque incur rather high bank charges.Under Dutch law, bills of exchange andcheques serve mainly to substantiate theexistence of a debt.

By contrast, bank transfers (Bankgiro) areby far the most common means of payment.All leading Dutch banks are linked to theSWIFT electronic network, which provideslow-cost, flexible and speedy processing ofinternational payments. Centralising ac-counts, based on a centralised local cashingsystem and simplified management of fundrepatriation, are also widely used.

■ Debt collectionThe collection process begins with the debtorbeing served with a formal demand for thepayment of principal plus accrued interest.

This is followed, where necessary, by theservice of a summons to pay by bailiff orsolicitor. Where the sales agreement makesno mention of the interest rate, from 1December 2002 the rate of interest applicableis the European Central Bank’s refinancingrate, marked up by seven percentage points.The rate in force before the first day of thesix-monthly period concerned appliesthroughout that period.

In the absence of payment oranagreement,creditors may engage a local lawyer toinitiate legal proceedings. The Dutch legalsystem allows lawyers to act as both barris-ters and solicitors: as solicitors they practisewithin the jurisdiction of their registration,whereas as barristers they may plead casesbefore any court in the country. Since 1March 2008, the function of ‘solicitor’ hasbeen abolished, and lawyers themselves arenow allowed to present the requisite docu-ments before any court in the Netherlands.

At this stage of the legal action, effectivepressure can be brought to bear on a debtorby means of a winding up petition. Suchpetition can succeed without much difficulty,provided two conditions are met: the appli-cant has submitted evidence of paymentdefault on an undisputed debt claim to thecivil court – there are no commercial courts– and a second claim of any kind (commercial,alimony, tax debt and so on) exists.

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Another procedure, also reserved forundis-puted claims, involves recourse to a simpli-fied fast-track procedure (kort geding) inrelatively widespread use, especially for civilclaims. With this procedure, the parties oftenaccept the provisional award granted by thejudge as final, thereby putting an end to thedispute. The summary ruling thus obtainedresults in provisional execution even if thedebtor lodges an appeal.

Ordinary proceedings in which both par-ties are heard are for the most part based onwritten submissions, with a simplified pro-cedure before a district court (kantongerecht)for claims under €5,000. Larger claims areheard by a court of first instance (Rechtbank),whereby both parties argue their case viawritten submissions. Unless the parties ex-pressly request the right to make an oralsubmission, which is rarely the case, the

judge bases his ruling on the principal casedocuments provided by the parties after theyhave appeared in court (notably to seek anamicable settlement).

For complex cases requiring special exam-ination, the judge will follow a more formalprocedure based on the examination of eachlitigant’s brief and counter-briefs. In suchmatters, the judge will carefully assessthe parties’ compliance with the generalterms and conditions of sale appearing oninvoices and purchase orders, since they formthe legal framework of the commercial con-tract and thus play a crucial role in theproceedings.

Finally, recourse to arbitration is commonin the Netherlands. Most arbitration bodieswork in specific fields and arbitrators areoften selected from among specialist lawyers.Arbitral awards tend to be based on equityrather than on legal considerations.


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WORLDNetherlands

NORWAY

95

1

NorwayPopulation (million inhabitants): 4.7GDP (US$ million): 336,100


RISK ASSESSMENTIn a country where one-quarter of the na-tional product and half of industrial produc-tion are directly or indirectly linked tohydrocarbon exploitation, it is hardly sur-prising that 2007 was another strong growthyear. Particularly accommodating fiscal pol-icy underpinned by a wealth of hydrocarbon-related resources has benefited all economicplayers. Underpinned by a marked increasein their disposable income amid both risingwages, spurred by a bright employmentpicture and moderating prices, householdsconsiderably increased their consumption.Already running at full production capacity,companies further increased their invest-ments. Exports, especially services andequipment related to hydrocarbon exploita-tion, benefited from strong demand notwith-standing the Norwegian krone appreciation.

In 2008, despite a marked slowdown, GDPgrowth should still exceed 3 per cent. The

consumption slowdown will be substantialfor households faced with the rising pricesfor electricity – from abnormally low levelsin 2006 – and slower job and wage growth.Residential investment should declineslightly amid markedly higher interest rates.Conversely, continuing capacity restraintswill prompt companies to go forward withpurchases of equipment and investments inindustrial and commercial premises. Tradi-tional exports will slow somewhat amidfurther appreciation of the krone, less fa-vourable external conditions and the contin-uing growth of production costs.

Corporate profits have grown strongly inrecent years with bankruptcies stabilising ata low level. The Coface payment incidentindex for Norwegian companies is excellent.The expected slowdown will be unlikely tojeopardise the overall situation even if somedeterioration is expected in the housingindustry.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth* 1.4 3.8 3.7 4.6 5.2 3.2Consumption (var.) 2.9 4.7 3.4 4.4 6.1 3.9Investment (var.) -4.9 6.1 9.7 7.8 8.5 6.5Inflation 2.5 0.5 1.5 2.3 0.6 2.9Unemployment 4.5 4.5 4.6 3.4 2.6 2.5Short-term interest 4.1 2.0 2.3 2.8 4.6 5.2Public sector balance (%GDP) 7.6 11.4 16.0 19.0 18.0 18.0Public sector debt (%GDP) 50 52 44 55 53 54Exports (var.) 5.1 3.0 5.7 9.0 6.8 4.0Imports (var.) 4.3 11.0 8.3 8.5 9.0 5.0Current account balance (%GDP) 12.9 13.8 16.7 16.0 17.0 20.0

* mainland, e = estimate, f = forecast


■ PaymentBills of exchange and cheques are neitherwidely used nor recommended, as they mustmeet a number of formal requirements inorder to be valid. In addition, creditorsfrequently refuse to accept cheques as ameans of payment. As a rule, both instru-ments serve mainly to substantiate theexistence of a debt.

Conversely, promissory notes (gjeldsbrev)are much more common in commercial trans-actions and offer superior guarantees whenassociated with an unequivocalacknowledge-ment of the sum due that will, in case ofsubsequent default, allow the beneficiary toobtain a writ of execution from the competentcourt (Namrett).

Bank transfers are by far the most widelyused means of payment. All leading Norwe-gian banks use the SWIFT electronic net-work, which offers a cheap, flexible and quickinternational funds transfer service.

Centralising accounts, based on a central-ised local cashing system and simplifiedmanagement of fund transfers, also consti-tute a relatively common practice. Electronicpayments, involving the execution of pay-ment orders via the Web site of the client’sbank, are rapidly gaining popularity.

■ Debt collectionThe collection process commences with thedebtor being sent a demand for the payment

of the principal amount, plus any contractu-ally agreed interest penalties, within14days.Where an agreement contains no specificpenalty clause, interest starts to accrue 30days after the creditor serves a demand forpayment and, since 1 January 2004, iscalculated at the Central Bank of Norway’sbase rate (Norges Bank), in effect on 1January and 1 July of the relevant year,increased by seven percentage points.

In the absence of payment oranagreement,creditors may go before the ConciliationBoard (Forliksradet), a quasi administrativebody, located in each municipality, compris-ing three elected, non-professional judgessitting collectively, to obtain a speedy rulingat low cost. To benefit from this procedure,they must submit documents authenticatingtheir claim, which should be denominated inNorwegian kroner (NOK).

The Conciliation Board then summons thedebtor at short notice to acknowledge ordispute the claim before hearing the parties,either in person or through their officialrepresentatives (stevnevitne). At this stage ofproceedings, lawyers are not systematicallyrequired. The agreement thus reached willbe binding as would be a judgement.

If a settlement is not forthcoming, the caseis referred to the court of first instance forexamination. However, for claims found tobe valid, the Conciliation Board has thepower to hand down a decision, which hasthe force of a court judgement. Where a

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defendant fails to respond to the arbitrator’ssummons or appear at the hearing, the Boardpasses a ruling in default, which also has theforce of a court judgement.

More complex or disputed claims are heardby the court of first instance (Byret). The ple-nary proceedings of this court are based onoral evidence and written submissions. Thecourt examines the arguments and hears the

parties’ witnesses before delivering a verdict.Norway does not have a system of commer-

cial courts, but the probate court (Skifteret)is competent to hear disposals of capitalassets, estate successions, as well as insol-vency proceedings.

Arbitration (voldgift) is mainly used forcommercial disputes with internationalramifications.


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PolandPopulation (million inhabitants): 38.1GDP (US$ million): 338,733


STRENGTHS• Integration into the EU and

modernisation of the productiveapparatus have enhanced Poland’sgrowth potential.

• Exports, which have diversified, havebenefited from increasing productivitygains that partly offset the zlotyappreciation.

• A still-limited current account deficit andrelatively large inflows of foreign directinvestment have eased Poland’svulnerability 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 regulatoryenvironment, functioning of publicadministrations and modernisation ofinfrastructure.

• Corporate foreign debt bears watching.• The improvement in the fiscal situation

could be compromised by the economicslowdown and political foot-dragging onfar-reaching reform of public spending.

RISK ASSESSMENTEconomic growth remained strong in 2007after peaking in the first quarter. Bothinvestments, underpinned by the good finan-cial health of Polish companies, and privateconsumption, buoyed by rising real wagesand a brighter employment picture, haveremained dynamic. Sectors close to buildingand public works, electronics, informationtechnology and pharmaceuticals have sub-stantially benefited from the buoyant eco-nomic conditions. The textile sector is stillshaky, however, while agriculture and thefood industry will have to continue theirrestructuring by taking advantage of theample financial resources made available bythe EU. Companies will, however, have tocope with two pitfalls: the increase in theirforeign debt and the difficulty in findingskilled labour due to extensive emigration.

Wage growth, FDI and European funding

will continue to spur domestic demand in2008. Growth should slow, however, underthe effect of rising payroll costs and weaken-ing European demand, which will affectinvestment and exports. The central bankhas moreover been tightening monetary pol-icy to limit inflationary pressures attributa-ble to a tight labour market and rising foodprices and energy costs.

Although growing, the current accountdeficit is still moderate compared to otherregional countries. FDI inflows and borrow-ing abroad should continue to cover thatimbalance with no particular difficulty. Thefirmness of public sector revenues has, more-over, facilitated limiting the fiscal deficit andstabilising government debt (47 per cent ofGDP). Poland’s integration into the euro zonenonetheless remains a remote prospect: 2013at the earliest after possible admission to theEU’s ERMII in 2009.

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The victory by the liberal opposition in theearly elections in October 2007 raises hopesfor revival of the reform process – privatisa-

tions and the business environment in par-ticular – and easier relations with the rest ofthe EU.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.9 5.3 3.6 6.2 6.5 5.2Inflation (%) 0.8 3.5 2,1 1.1 2.2 3.0Public sector balance (%GDP) −6.3 −5.7 −4.3 −3.8 −2.7 −3.2Unemployment (%) 20.0 19.1 17.6 14.9 11.4 10.2Exports 61.0 81.9 96.4 117.5 138.1 161.7Imports 66.7 87.5 99.2 124.5 150.8 178.3Trade Balance −5.7 −5.6 −2.8 −7.0 −12.7 −16.6Current account balance −4.6 −10.7 −4.8 −11.1 −18.1 −22.7Current account balance (%GDP) −2.1 −4.2 −1.6 −3.3 −4.3 −4.5Foreign debt (%GDP) 49.5 51.4 43.7 49.4 49.2 47.3Debt service (%Exports) 20.2 18.8 17.2 11.1 10.6 10.0Foreign exchange reserves (in months ofimports)

4.7 3.7 3.9 3.4 3.5 3.1



■ Market overviewSince 1 January 2007, the gross minimumwage has been 936 zlotys (€250) while theaverage wage at end October 2007 was 2,859zlotys (about €765).

■ Means of entrySweeping reform of the laws and regulationsgoverning market access has brought Polandinto line with EU standards. Since EUaccession on 1 May 2004, there are no longerany customs barriers between Poland andthe member states of the EU.

■ Attitude towards foreign investorsDrawing on the country’s clear competitiveadvantages, the Polish government has suc-cessfully attracted numerous foreign inves-tors. According to the Polish central bank(NBP), in four years, FDI inflows have morethan doubled from €46 billion in 2002 to€94.4 billion at end-2006.

FDI in 2006 rose by 82 per cent over 2005from €8.3 billion to €15 billion. The sectorsfavoured by foreign investors in 2006 wereservices – including real estate services – (€5billion), followed by manufacturing (€3.5

billion), retail and commercial property (€2.4billion), financial services (€1.6 billion), buy-ing and selling of real estate (€0.9 billion)and other sectors (€1.6 billion).

The real estate sector accounts for over 40per cent of overall FDI as, in addition to thepurchase and sale of existing property worth€0.9 billion, most investment in retail, man-ufacturing and services has a sizeable realestate component. Furthermore, the rise ofthe service sector supplanting manufactur-ing is a new trend and is indicative of thegradual transition of Poland’s still manufac-turing-dominated economy to a services-ledone.

Of this total, privatisation-related FDI istiny because of the all but complete suspen-sion of privatisations since the rise to powerof the conservative right, Prawo i Sprawied-liwosc (PiS, Law and Justice), in 2005.

Safeguards for foreign investors have beenstrengthened and there are now no restric-tions on the repatriation of dividends. How-ever, the administrative apparatus is still farfrom perfect. Administrative procedures re-main lengthy and complex, despite the com-mitment of successive governments tosimplifying them. The election in November

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2007 of a new government led by the liberalplatform, Platforma Obywatelska (PO, Citi-zens’ Platform), should lead to greater flexi-bility in this field and even help to kick startthe privatisation process.

■ Foreign exchange regulationsThe zloty’s exchange rate is freely deter-mined by the market with a central peg setdaily by the National Bank of Poland. Thezloty has been fully convertible since 1October 2002. Poland has not yet set atimetable for the adoption of the singlecurrency as Mr. Kaczynski’s government didnot consider that an economic priority. Butthe arrival of the ultraliberal PO-ledcoalitiongovernment in autumn 2007 could acceleratemoves towards the euro’s adoption. Duringthe election campaign, the PO declaredseveral times its intention of including Po-land into the euro-area shortly. The datecommonly mentioned is 2012. The prospectof joining sooner seems unrealistic.


PaymentBills of exchange and cheques are not widelyused, as they must meet a number of formalissuing requirements in order to be valid.Nevertheless, for dishonoured and protestedbills and cheques, creditors may resort to afast-track procedure, resulting in an injunc-tion to pay.

Until now, cash payments were commonlyused in Poland by individuals and firmsalike, but under the ‘Freedom of businessactivity Act’ (Ustawa o swobodzie działal-nosci gospodarczej), of 2 July 2004, whichcame into force on 21 August2004, companiesare required to make settlements via bankaccounts for any transaction exceeding theequivalent in złotys of €15,000 even whenpayable in several instalments.Thismeasureaims to counter fraudulent money launder-ing. One highly original instrument is theweksel in blanco, an incomplete promissorynote bearing only the term ‘weksel’ and theissuer’s signature at the time of issue.

The signature constitutes an irrevocablepromise to pay and this undertaking isenforceable upon completion of the promis-

sory note (amount, place and date of pay-ment) in accordance with a prior agreementbetween issuer and beneficiary. Weksels inblanco are widely used, as they also consti-tute a guarantee of payment in commercialagreements and the rescheduling of pay-ments.

Bank transfers have become the mostwidely used payment method. LeadingPolishbanks – after an initial phase of privatisationand a second phase of concentration – usethe SWIFT network, which offers a cheap,flexible and quick domestic and internationalfunds transfer service.

Debt collectionIt is advisable, as far as possible, not toinitiate recovery proceedings locally due notonly to the cumbersome formalities and thehigh cost of legal action, but also to thecountry’s lengthy court procedures: it takesalmost two years to obtain a writ of executiondue to the lack of judges adequately trainedin the rules of the market economy andproper equipment.

Serving a demand for payment, properlyaccompanied by proof of debt, reminds thedebtor of his obligation to pay the outstand-ing sum, plus any accrued interest. Since theterm of limitation for receivables arisingfrom a merchandise sales contract, and anyensuing past-due interest, is only two years,suppliers should exercise extreme vigilance.

From 1 January 2004, interest may beclaimed as of the 31st day following deliveryof the product or service, even where theparties have agreed to a longer paymenttime. The legal interest rate will apply fromthe 31st day until the contractual paymentdate. Thereafter, in case of late payment, thetax penalty rate will apply and it will veryoften be higher than the legal interest rate,unless the contracting parties have agreedon a higher interest rate.

It is advisable to seek an amicable settle-ment based on a payment schedule drawn upby a public notary, which includes an enforce-ment clause that allows creditors, in theevent of default by the debtor, to go directlyto the enforcement stage, subject to acknowl-edgement by the court of the binding natureof this document.

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Creditors may seek an injunction to pay(nakaz zaplaty) via a fast-track and lessexpensive procedure, provided they producepositive proof of debt (like bills of exchange,cheques or unpaid weksels in blanco or elseacknowledgements of debt.). If the judge isnot convinced of the substance of the claim –a decision he or she alone is empowered tomake – he or she may refer the case to fulltrial.

Ordinary proceedings are partly in writingwith the parties filing submissions accompa-nied by all supporting case documents (orig-inal or certified copies) and partly oral withthe litigants, their lawyers and their wit-

nesses heard on the main hearing date. Atsuch legal proceedings, the judge is required,as far as possible, to attempt conciliationbetween the parties.

Although each party bears his own legalcosts incurred in the course of the proceed-ings, after making a ruling the court willgenerally require the losing party to bearmost of the cost of the procedure.

Commercial disputes are generally heardby the economic courts (sad gospodarczy),falling under the jurisdiction of eitherdistrictcourts (sad rejonowy) or regional courts (sadokregowy) or Voıvodies courts, depending onthe size of the claim.


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OPPORTUNITY SCOPE



Mn USDMn USD


Germany FranceItaly UK CzechRepublic

RussiaGermany Italy FranceNetherlands

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%

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

IMPORTS by products

0

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10000

15000

20000

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30000

05000

10000150002000025000300003500040000



Indicators Poland Regional averageEmergingcountry average


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PortugalPopulation (million inhabitants): 10.6GDP (US$ million): 194,600


RISK ASSESSMENTGrowth accelerated slightly in 2007, drivenby domestic demand and exports. Weak wagegrowth prompted households to take on moredebt to fund their spending. Corporate in-vestment registered a significant upturnthatallowed productivity and competitiveness toimprove slightly. Exports thus grew at a highrate, particularly in the services sector. Anincrease in debt service notwithstanding, thegovernment continued to pursue its publicdebt reduction objectives.

In 2008, the economy should grow at a rateto that registered in 2007. With householdscarrying heavy debt representing 124 percent of their disposable, they will cut back onconsumption amid slow job creation, highinterest rates and increasing taxes. Therecovery – albeit weak – of property invest-ment spurred by tourism and populationmovements from rural to large urban areascould be undermined by more difficult condi-tions of access to credit. Companies willcontinue to reap the benefits of restructuringdone in recent years and will continue withtheir investment programmes. Low labourcosts will underpin their competitiveness.Thanks to the performance of tourism-re-

lated services and transport industries, ex-ports will remain at a good level despite thedemand slowdown expected in the EU, whichrepresents 70 per cent of the externalmarket.The excessively large current account deficitwill thus continue to decline. Despite thelagging pace of the public administrationrestructuring programme, the governmentwill continue the process of growth conver-gence with the other euro zone countries byfurther reducing its public deficit.

After declining for nearly two years, cor-porate bankruptcies surged, up 21.8 per centin the first nine months of 2007, a trendreflected by the Coface payment incidentindex, which is above the world average. Theeconomic fabric will remain weakened by theground that has to be made up in manysectors in integrating new technologies andimproving labours skills. That applies inparticular to the textiles-clothing and shoeindustries that have been contending withintense competition not only from low-costcountries but also from emerging Europe andEuromed. The consolidation of those sectorswill thus continue in 2008. Portugal’s A2business climate rating is born out by thecomplexity of the legal collection procedure.

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Percentage 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth −1.1 1.2 0.4 1.3 1.8 1.9Consumption (var.) 0.1 2.4 2.0 1.1 1.4 1.4Investment (var.) −10.0 −0.9 −2.7 −1.6 0.9 2.1Inflation 3.3 2.5 2.1 3.1 2.4 2.3Unemployment 6.3 6.7 7.7 7.7 8.0 8.0Short-term interest 2.3 2.1 2.2 3.0 4.0 4.0Public sector balance (%GDP) −2.8 −3.1 −6.0 −3.9 −3.3 −2.9Public sector debt (%GDP) 62 63.9 64.0 64.8 64.4 63.7Exports (var.) 4.0 4.6 0.9 8.9 6.9 6.0Imports (var.) −0.4 6.8 1.8 4.3 3.4 4.2Current account balance (%GDP) −5.9 −7.3 −9.3 −9.9 −9.1 −8.6



■ PaymentBills of exchange are widely used for com-mercial transactions in Portugal. In order tobe valid, however, they are subject to stampduty whose rate is set each year in thecountry’s budget. The current rate of stampduty is 0.5 per cent of the amount of the bill,or a minimum of €1. A bill of exchange isgenerally deemed independent of the con-tract to which it relates.

While creditors, in the event of paymentdefault, are not required to issue a protestnotice before bringing an action to court,such a notice can be used to publicisepayment default and pressure the debtor tohonour his obligations, albeit belatedly.Cheques too are widely used. They arepayable on presentation and subject to theminimum stamp duty that is borne by thebank. It is no longer an offence to issueuncovered cheques as a guarantee for stag-gered payments.

In the event of default, cheques, bills ofexchange and promissory notes offereffectiveguarantees to creditors as they are enforcea-ble instruments in law and entitle holders toinitiate executory proceedings. Under thisprocess, creditors may petition the court toissue a writ of execution and notify the debtorof such an order. Where the debtor still failsto pay up, creditors may request the court toissue an attachment order against debtor’s

property. Flexible and efficient bank trans-fers via the SWIFT electronic network, forwhich large Portuguese banks are equipped,are also used for a growing proportion ofpayments.

■ Debt collectionOut-of-court collection starts with the debtorbeing sent a final demand for the payment ofthe principal amount, plus any default inter-est that may have been agreed between theParties, within eight days. Except whenstipulated otherwise in the commercialagreement, the rate of interest applicable isthe European Central Bank’s refinancingrate marked up by seven percentage points.

Since 1 October 2004, interest rate sethenceforth by decree of the Treasury Depart-ment, will be published in the Diario daRepublica during the first fortnight of Janu-ary and July each year and be applicable forthe six coming months. The fast-track proce-dure (injunction to pay, – injuncao) applica-ble to commercial claims considereduncontested – and, since 19 March 2003,whatever the amount involved – must beheard by the court in whose jurisdiction theobligation is enforceable. Since September2005, the injunction may be served as anelectronic file.

For disputed claims, creditors may initiateformal and costly ‘declarative proceedings’(accao declarativa), lasting a year or more,to obtain a ruling establishing their right to

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payment. They must then initiate ‘enforce-ment proceedings’ (accao executiva) toenforcethe court’s ruling.

Under the revised Code of Civil Procedureintroduced in January 1996, any originaldeed established by private seal (ie anywritten document issued to a supplier) inwhich the buyer unequivocallyacknowledgeshis debt is henceforth deemed an instrumentenforceable by law. This provision aims toencourage buyers to comply with contractualundertakings and offers creditors a safe-guard against protracted legal action. Legalrecourse in civil matters was revised in

October 2006 to allow the judge to adapt theprocedure to the needs of each case andaccelerate the pace of the proceedings.

As Portugal does not have commercialcourts – other than those in Lisbon and VilaNova de Gaia (Porto), which deal with actionsto void partner resolutions, insolvency pro-ceedings, dissolution of companies and pro-tection of industrial property – courts of firstinstance (tribunal de comarca) have genericcompetence in this regard. The Varas Cıveis,civil courts with a three-judge panel presid-ing, hear large commercial claims exceeding€30,000.


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RomaniaPopulation (million inhabitants): 21.5GDP (US$ million): 121,609


STRENGTHS• Romania boasts a relatively large

domestic market and a skilled, low-cost,work force.

• Integration into the EU has improved thecountry’s economic outlook.

• FDI inflows have thus far allowed thecountry to cover its external deficits withno particular difficulty and build up acushion of foreign exchange reserves.

• The public sector has little debt.

WEAKNESSES• Procyclical economic policy has

exacerbated the current account deficitand spurred inflation.

• The country’s dependency on foreigncapital has been growing.

• Rising interest rates and thedepreciation of the leu will affect thebudgets of companies and householdswith part of their debt denominated inforeign currencies.

• The tensions at the highest reaches ofthe government, in conjunction with itsminority position and the approach oflegislative elections, have not facilitatedreform implementation or economicpolicy management.

RISK ASSESSMENTAlthough down compared to 2006, duemainly to a more negative foreign tradecontribution, economic growth nonethelessremained relatively strong in 2007. Thegovernment’s reaction to the overheatingrisk was inadequate and Romania was theregional country most affected by the finan-cial turmoil triggered in the United Stateslast summer. The Romanian leu was stillunder strong pressure late last year. Bothincome and fiscal policy continue to beexpansionary, which could heighten infla-tionary pressures and exacerbate externalimbalances. Despite the stronggrowth,risinginterest rates and the greater selectivityexercised by local banks have weakenedcompanies already deeply in debt. Althoughthe consumer goods sector has shown a

degree of vulnerability on that score, subsid-iaries of major groups, in the automotiveindustry and telecommunications in partic-ular, have remained solid. In the face offoreign competition, the textile sector hascontinued, meanwhile, to experience seriousdifficulties.

Government spending and rising realwages will continue to buoy the economy thisyear, while the current account deficit shouldgrow slightly in relation to GDP. This contin-uing imbalance has increased the country’svulnerability to a crisis of investor confidenceespecially with FDI likely to decline due tocompletion of the privatisation programme.The rapid growth of private foreign debt andbank credit, largely denominated in foreigncurrencies, could render the private sector

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vulnerable in case of a sharp exchange ratecorrection or marked economic slowdown.

Bitter dissension continues to wrack thetop echelons of the government and the

upcoming legislative elections could bebrought forward to June 2008, which doesnot augur well for progress on reforms or fortighter fiscal policy any time soon.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.2 8.4 4.1 7.7 5.8 5.2Inflation (%) 14.1 9.3 8.6 4.9 6.1 4.6Public sector balance (%GDP) −1.5 −1.5 −1.4 −1.9 −2.7 −3.2Unemployment (%) 7.4 6.3 5.9 5.2 4.5 4.4Exports 17.6 23.5 27.7 32.3 39.6 46.8Imports 22.2 30.2 37.3 47.2 63.8 79.4Trade balance −4.5 −6.7 −9.6 −14.8 −24.2 −32.6Current account balance −3.3 −6.4 −8.6 −12.8 −22.3 −27.4Current account balance (%GDP) −5.6 −8.5 −8.7 −10.5 −13.8 −14.6Foreign debt (%GDP) 40.1 41.4 38.1 43.9 48.6 60.0Debt service (%Exports) 14.2 13.8 11.8 11.3 14.4 12.6Foreign exchange reserves (in months ofimports)

3.7 4.7 5.0 5.6 5.1 4.4



■ Market overviewRomania joined the EU on 1 January 2007.Accession has been accompanied by specialclauses in three key areas. First, the admin-istration of justice and home affairs where acooperation and verification mechanism al-lows the European Commission (EC) tomonitor progress towards legal reform (no-tably the drawing up of new rules of criminalprocedure and operation of the justice sys-tem) and the fight against corruption. In itsfirst report published on 27 June 2007, theEC acknowledges the progress achieved, butconsiders the efforts to fight corruption in-adequate. It deplores the fact that no convic-tions have been forthcoming in casesinvolving high-level corruption and directedthe Romanian government on 10 October2007 to put in place an anti-corruption actionplan. If the EC deems progress unsatisfac-tory, it could implement sanctions under theaccession treaty, including withdrawal ofautomatic recognition, by other memberstates, of sentences handed down by Roma-nian courts.

Second, on the subject of community aid,in a letter sent to the Romanian Ministry ofAgriculture on 10 October 2007 by theagricultural and rural development commis-sioner, the EC warns of the possibility of a25 per cent (€110 million) cut in agriculturalsubsidies granted to Romania. To avoid thispenalty, the Romanian government mustremedy serious flaws in the integrated con-trol system for the payment of CommonAgricultural Policy (CAP) subsidies. Finally,restrictive measures have been taken overthe free movement of goods in the domesticmarket in a bid to ensure food safety. Thesemeasures mainly focus on foodstuffs of ani-mal origin.

Following approval of five out of seven ofRomania’s Sectoral Operational Pro-grammes by Brussels in July 2007, the firstinvitations to tender for projects co-financedby the Structural and Cohesion Funds 2007–2013 were issued in September 2007. In all(rural development included), almost €30billion of European fundingcouldbeallocatedby the EC to Romania over the 2007–2013period. Of this amount, nearly €9 billioncould be set aside for the development of

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transport, infrastructure and the environ-ment, both areas in which Romania is seri-ously lagging behind.

The prospect of accession has helped boostFDI . FDI inflows rose sharply from €4 billionin 2004 to €5 billion in 2005 and then to €9billion in 2006. They might ease back to €5billion in 2007 because of fewerprivatisationsand a relative decline in other inflows.Foreign trade has also surged on the prospectof accession, 70 per cent of which is carriedout with the EU.

■ Means of entryOn 1 January 2007, Romania fully adoptedthe Common External Tariff of the EU,including its preferential provisions (Com-munity’s generalised system of preferencesand free-trade agreements) in respect of thirdcountries. Systematic customs inspectionsinvolving the submission of a Single Admin-istrative Document (SAD) now only apply totrade with third, non-EU, countries. EUcompanies looking to trade with Romaniamust complete a traded goods declaration(Declaration d’Echange de Biens, DEB) form.This declaration serves a twin purpose:monitoring compliance with VAT rules andcompiling trade statistics.

■ Attitude towards foreign investorsRomania is inherently open to foreign invest-ment. Since 1 January 2005, it applies 16 percent flat-rate corporation tax (against 25 percent previously) and income tax. The law ofJuly 2001 defines the legal framework forforeign investment and reaffirms equal treat-ment for all investments. The Romaniangovernment has for several months beeninvolved in preparing an investment bill forboth foreign and domestic investment in aneffort to comply with EU government subsi-dies criteria. The bill’s first section, whichconcerns state subsidies for regional devel-opment, was made public by governmentdecree.

Generally speaking, the relationship be-tween the private sector and governmentdepartments remains difficult. While theoverall business environment has improved,it is still tributary to slow and incoherentadministrative and judicial procedures. Con-

sultation with the private sector is all toooften a pure formality. There is still someway to go towards a complete overhaul of theRomanian administrative apparatus. Lackof trained staff and inadequate co-ordinationbetween ministries and between central andlocal government are the most frequentlymentioned drawbacks.

Corruption remains a problem. Using acorruption perception index based on a sur-vey of experts and business leaders, Trans-parency International’s 2007 annual reportranks Romania 69 out of 177, just behindColombia and on a par with Ghana. It is theworst ranked EU country, after Bulgaria(ranked 64).

■ Foreign exchange regulationsThe ron is a floating currency with aninflation target. It has risen sharply againstboth the euro and the dollar since 2004 onthe back of massive capital inflows generatedby the liberalisation of capital accounts inSeptember 2006. The currency edged back inAugust/September 2007 following the inter-national credit squeeze. The ron’s nominaldepreciation against the euro by 8 per centin September 2007 shows that its apprecia-tion was caused mainly by speculativecapitalinflows. By mid-October, the ron had recov-ered to its March 2007 level.

Romanian importers can obtain foreigncurrency from their banks. Business personsand private individuals can open foreigncurrency accounts with, and obtain foreigncurrency loans from, Romanian and foreignbanks. Both nationals and foreigners whoare registered and doing business inRomaniamay hold and freely dispose of all theirforeign currency funds. Non-residents cannow open and operate ron accounts.


■ PaymentBills of exchange and especially promissorynotes are the payment methods most com-monly used for domestic, and sometimesinternational, transactions. In case of non-payment, duly protested bills of exchangeconstitute, once recognised as valid by thecourt, an enforcement order permitting the

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beneficiary to proceed with immediate forcedexecution (executie silita) against the debtor.The use of cheques is also relatively common-place, especially locally. Cheques allow cred-itors to exert substantial pressure on debtorssince an unpaid cheque not only gives accessto forced execution but also constitutes acriminal offence with the offender liable to aproportional fine, or even a prison sentenceof six months to a year. That is why articlesof associate often stipulate that onlycompanymanagers have the authority to writecheques.

Furthermore, a Registry of Payment Inci-dents (Centrala Incidentelor de Plati) main-tained by the Romanian National Bank,comprises two computer files – updated bythe interbank communications network –one on late payments involving bills ofexchange and cheques and the other on majorpayment defaults involving legal entities ornatural persons.

Finally, bank transfers are becoming themost common payment method with themain Romanian banks – after an initialprivatisation phase and a subsequentconcen-tration phase – now linked to the SWIFTelectronic network, which provides low-cost,flexible and rapid processing of domestic andinternational payments.

■ Debt collectionIt is advisable, where possible, to avoidtaking legal action locally due not only to theformalism and high cost of legal proceduresbut also to the slow pace of court proceedings:it takes almost three years to obtain anenforcement order because of a lack of judgeswith adequate training in market economypractices and proper equipment. To improvethe efficiency and transparency of the Ro-manian judicial system the Act of 19 July2005 amended several legislative texts onjudicial organisation and the status of themagistrature. Formal notice to pay servedon the debtor, accompanied by documentssupporting the claim, remind him of hispayment obligations, increased by past-dueinterest. Since January 2000, in interna-

tional trade relationships the annual past-due interest rate is set at 6 per cent unlessagreed otherwise by the parties and providedRomanian law applies to the contract.

As stipulated in the civil procedure code,any legal action based on a cash commercialclaim must be preceded by an attempt atconciliation between the parties within 30days of the creditor’s summons. In thisregard, it is always wise to give preference toout-court-settlement, based on a reschedul-ing plan for the arrears prepared by thecreditor’s legal counsel or established inpreference as a notarial deed, which willmake it possible to obtain an enforcementorder against the debtor more quickly in caseof failure to comply with the agreement.

Possessing clear proof of debt that is duefor payment and undisputed (acknowledge-ment of debt, promissory note, unpaidcheque, for example), the creditor can haverecourse, since mid-August 2001, to an in-junction to pay (somatie de plata), a summaryprocedure that allows the judge – if heconsiders the demand substantiated – toissue a writ ordering the debtor to pay theprincipal and legal costs within 10–30 daysof notification of the ruling.

Conversely, if the creditor‘s petition for aninjunction is dismissed by the court, thejudge’s decision is irrevocable and the onlyremaining recourse would then be to initiatean ordinary procedure. Similarly, in case ofobjection (cererea ın anulare) filed by thedefendant within 10 days, the case is treatedas a dispute subject to an ordinaryprocedure.

Ordinary proceedings are partly in writingwith the parties or their lawyers, filingsubmissions accompanied necessarily by allsupporting case documents (original or cer-tified copies) and partlyoralwiththe litigantsand their witnesses heard on the mainhearing date. Courts fees are set annually bygovernment order. Commercial disputes areheard by either local courts (judecatoria) orregional courts (tribunalul), acting as acommercial section, depending on the size ofthe claim.

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110

OPPORTUNITY SCOPE



Mn USDMn USD


Italy TurkeyGermany Hungary France ItalyGermany China HungaryRussia

EXPORTS by products■ Clothing and shoes 22%■ Mechanical machinery and equipment 20%■ Metals 15%■ Mineral products 10% ■ Machinery and transport equipment 10%■ Other 23%

■ Mechanical machinery and equipment 24%■ Mineral products 15%■ Machinery and transport equipment 12%■ Metals 10%■ Clothing 8%■ Chemicals 8%■ Other 24%

IMPORTS by products

0

2000

4000

6000

8000

10000

0

1000

2000

3000

4000

5000



Indicators Romania Regional averageEmergingcountry average


RUSSIA

111

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RussiaPopulation (million inhabitants): 142.4GDP (US$ million): 986,940

Country @rating: BMedium-term rating: Quite low riskBusiness climate rating: B

STRENGTHS• Russia is endowed with a wealth of

natural resources and a skilled labourforce.

• Clearing public sector debt has given thegovernment greater leeway for action.

• The 2014 Winter Olympic Games inSotchi afford a new opportunity todevelop infrastructure and enhance thecountry’s attractiveness to tourists.

• Benefiting from notable politicalstability, Russia has strengthened itsregional and energy status.

WEAKNESSES• The investment rate is among the lowest

for major emerging countries.• The industrial sector lacks

competitiveness due to pressures exertedby the real exchange rate and theobsolescence of capital equipment.

• Government direct or indirect takeoversof an increasing number of companiescould harm their development and fostermanagement ineffectiveness.

• Reforms adopted are generally notimplemented or, when implemented,often perverted from their originalpurpose to serve special businessinterests.

RISK ASSESSMENTThe economy remains buoyant, thanks todynamic household consumption and moreexpansionary fiscal policy in the run-up tothe December 2007 legislative elections andpresidential elections held in March 2008.Investment has been growing at an acceler-ated rate but still remains low in relation toGDP. The increased demand has benefitedthe retail trade, construction and industry,whose performance has been good. Oil-sectorproduction, meanwhile, should be relativelyflat. In this context, the Coface paymentexperience on Russian companies remainsgood, with domestic payment failures stilleasing. Corporate ownership and financialtransparency is still, however, very inade-quate with limited application of the law and

extensive corruption continuing moreover toundermine the business climate.

The external financial situation remainshealthy despite the growth of imports andthe slowdown of non-oil exports. Massiveinflows of FDI have, however, offset theshrinkage in the current account surplus.Russia continues to accumulate foreignexchange reserves – the world’s third largestin value terms after China and Japan.Liquidity crisis risk is thus very limited atthis juncture. And the government has en-tirely repaid its debt. The exponentialgrowthof corporate and bank debt constitutes, how-ever, a vulnerability. Credit risk – in acontext of unstable relations between thegovernment and the private sector – could beunderestimated. With the rapid expansion of

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credit, particularly to households, risks inthe banking system remain substantial.

In the political arena, the government hasreasserted, sometimes with vehemence, Rus-sia’s regional power status, which has stokedtensions, particularly with neighbouringcountries. Domestic political stability, mean-while, rests on a far-reaching recentralisa-

tion of power. The large majority won by theUnited Russia Party in the December legis-lative elections last year will allow VladimirPutin to preserve his central role in theRussian political system, whatever his offi-cial function after the forthcoming presiden-tial elections this March.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.3 7.2 6.4 6.7 7.0 6.8Inflation (%) 12.0 12 10.9 9.0 11.9 9.3Public sector balance (%GDP) 1.7 4.3 7.5 7.4 4.7 2.5Exports 135.9 183.2 243.6 303.9 315.2 332.6Imports 76 97.4 125 165 210.3 249.2Trade balance 59.9 85.8 118.1 139.2 104.9 83.4Current account balance 35.4 58.6 83.6 94.5 61.7 42.8Current account balance (%GDP) 8.2 9.9 10.9 9.6 5.1 2.9Foreign debt (%GDP) 40.3 34.4 30.6 28.7 30.1 30.1Debt service (%Exports) 13.0 21.9 22.5 18.2 11.8 12.6Foreign exchange reserves (in months ofimports).

8.9 11.4 13.3 17.4 19.8 20.6



■ Conditions of access to the marketRussia has carried out customs reforms since2001, resulting in a reduction in the averagerate of duty from 16 to 11 per cent, theunification of customs duties by productgroup and the introduction on 1 January2004 of a new customs code. The code aimsto facilitate trade through the establishmentof a system of simplified procedures and thealignment of customs procedures with inter-national (notably European) standards. Itfurther seeks to enhance legal transparencyand cut customs clearance times. Article 152of the code requires customs officers to clearimported goods within three days of a decla-ration’s acceptance. In practice, however, thesimplified procedures are not followed be-cause of a lack of proper implementingregulations. Moreover, the interpretation ofrules varies from one customs post to an-other. Also corruption in the customs serviceremains endemic.

■ Attitude towards foreign investorsTax reform, the main policy achievement ofthe 2000–2001 period, has helped create amore favourable environment for foreigninvestors. Taxation has been eased bycutting, among other things, corporationtax (capped at 24 per cent), personal incometax (13 per cent flat rate) and VAT (downto 18 per cent from 20). Changes to the taxcode introduced in July 2006 further curtailthe powers of the tax authorities. Auditprocedures should therefore become moretransparent.

Administrative reforms designed to reducethe state’s economic role have led to legisla-tion that simplifies company registrationandlicence award procedures. But the reformsare still at an embryonic stage. A number ofactivities in Russia are subject to a licence(construction, banking, health care andphar-maceuticals, alcohol production, metalwork-ing, gem-cutting, transport, gaming, moneylending, telecommunications, aeronautics,carrying of firearms, etc). Federal Law no.

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113

1

128 on the award of licences lists 105activities in all subject to federal licensing.

Awareness of the advantages of protectingintellectual property rights has resulted inimproved safeguards legislation and con-certed discussions on ways to combat in-fringement, especially of drug patents.Adopted in December 2006, the fourthsectionof the civil code dealing with intellectualproperty protection will come into force on 1January 2008.

The law of 13 July 2005 establishingspecial economic zones could be of interest toforeign investors as it grants duty exemp-tions and tax incentives. It creates three suchzones: manufacturing, technology develop-ment and tourism, plus the industrial portareas set up under the law of 14 June 2007and the special economic zones of Magadanand Kaliningrad. The zones should helpreduce administrative obstacles for compa-nies, facilitating access to credit and cutrental costs.

A bill on foreign investment procedures instrategically important commercial organi-sations, jointly prepared by the Ministries ofIndustry and Energy, Trade and EconomicDevelopment, Defence and the FSB, is underreview by the Douma. This bill, which limitsforeign investment in certain sectors, definesthe activities deemed strategically important

for Russia where foreign investment is regu-lated. It focuses on the introduction of anapprovals procedure similar to that found inFrench, US and Spanish legislation andcovers 39 activities related to defence, air-craft manufacture, space exploration, nu-clear power, etc. If it appears in a deal that aforeign investor is in the process of acquiringcontrol of a Russian company that is strate-gically important for national security, theinvestor must seek permission from thecompetent government commission, whichhas a duty to reply within three months.

It is however not uncommon for investorsto encounter difficulties arising from ineffec-tive law enforcement and excessive red tape.For instance, the application of the tax codeby the tax authorities occasionally tends topenalise foreign companies (revocation ofpreviously acquired benefits, lengthy andbiased tax audits). Besides, the Yukos affairhas created uncertainty about both the direc-tion of government economic policy and theuniform application of law in Russia.

■ Foreign exchange regulationsA law implemented in June 2004 calls for thegradual lifting of exchange controls by 2007.Full liberalisation though was brought for-ward to 1 July 2006. Special accounts andcompulsory capital reserves for Russiansandforeigners have since been abolished.

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114

OPPORTUNITY SCOPE



Mn USDMn USD


Netherlands ChinaGermany Ukraine Turkey ChinaGermany Ukraine SouthKorea

Japan

EXPORTS by products■ Oil and oil by-products 44%■ Gas 13%■ Metals 14%■ Machinery and equipment 6%■ Chemicals 6%■ Other 18%

■ Machinery and equipment 51%■ Chemicals 17%■ Agricultural products and foodstuffs 17%■ Metals 7%■ Other 9%

IMPORTS by products

05000

10000150002000025000300003500040000

0

5000

10000

15000

20000



Indicators Russia Regional averageEmergingcountry average


SERBIA

115

1

SerbiaPopulation (million inhabitants): 7.4GDP (US$ million): 31,808


STRENGTHS• The political normalisation and reforms

undertaken since 2000 have allowedSerbia to win the backing of theinternational financial community and toconsolidate its economic and financialsituation.

• Debt relief sharply reduced the publicsector debt burden, the banking systemwas restructured and privatised, and asuitable framework was established forinvestments.

• Foreign exchange reserves have reachedvery high levels.

• The country benefits from a skilled, low-cost workforce.

WEAKNESSES• An excessively large current account

deficit has generated external financingneeds at difficult-to-sustain levels.

• Private foreign debt has been growingrapidly.

• Many projects remain to be implementedor continued including the restructuringof state-owned companies, intensificationof the anti-corruption campaign andreform of legal and administrativeinstitutions.

• The political situation remainsprecarious due to the failure of theKosovo final-status negotiations and therisk of a nationalist backlash.

RISK ASSESSMENTThe economy continues to grow at a fast clip,driven by domestic demand and a dynamicservices sector. The effects of the morerestrictive monetary policy options adoptedsince August 2007 and the likely worlddemand slowdown should be offset by dy-namic consumption spurred by the continu-ing rise of wages as well as by investmentsmade in recently privatised companies andincreased public capital spending.

Major imbalances, nonetheless, continueto mark that growth, epitomised by a nettle-some widening of the current account deficit,notably reflecting the slow pace of state-owned company restructuring. The sharpincrease in wages and the loosening of fiscaldiscipline have intensified that unfavourabletrend since 2006.

Despite the high volume of FDI inflows,

private external debt has increased substan-tially, reducing the beneficial effect of thedebt restructuring granted by official credi-tors in 2001 and the London Club in 2004.Besides the risk of a hard landing for theeconomy, the sharp deterioration of externalaccounts has increased currency crisis riskdespite the limited amount of short-termdebt and the very comfortable levels offoreign exchange reserves.

Political risk has, moreover, remainedhighdespite the formation of a reformist govern-ment in May 2007, following elections inJanuary. Further to the failure of negotia-tions between Serbs and Albanian Kosovarsin December 2007, it seems that Kosovo’sdeclaration of independence is a likely out-come. This situation brings a risk of govern-ment instability and deterioration ofrelations with the European Union.

EUROPE AND THE CIS

116


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.5 8.4 6.2 5.7 6.5 6.0Inflation (%) 7.8 13.7 17.7 6.6 7.0 5.9Public sector balance (%GDP) -3.2 0.0 0.7 -1.6 -2.5 -1.0Unemployment (%) 14,6 18.5 20.1 19.5 18.8 17.4Exports 2,477 3,897 4,647 6,487 7,849 9,184Imports 7,324 10,944 10,210 12,715 15,512 17,374Trade balance -4,847 -7,047 -5,563 -6,228 -7,663 -8,190Current account balance -1,928 -2,922 -2,088 -3,654 -5,217 -5,522Current account balance (%GDP) -9.5 -12.0 -8.0 -11.7 -13.3 -12.7Foreign debt (%GDP) 66.6 57.8 59.4 62.9 63.0 68.0Debt service (%Exports) 6.4 9.6 10.9 16.7 20.8 22.3Foreign exchange reserves (in months ofimports)

4.9 3.9 5.4 8.4 8.0 8.1


CONDITIONS OF ACCESS TO THE MARKET■ Market overviewDespite all the questions, Serbia’s politicalcontext undoubtedly raises over the futurestatus of Kosovo and the ramifications of itscooperation with the International CriminalTribunal for the former Yugoslavia (ICTY)regarding a stabilisation and associationagreement, its EU candidate country status,and indeed the development of democraticinstitutions in the country, the economicsituation is excellent, underpinned by stronggrowth, sound public finances, low inflation,rising foreign exchange reserves and a recordlevel of FDI in 2006.

Multilateral and bilateral funding towardsthe country’s reconstruction make sectorslike building and public works, transport,energy, water and the environment espe-cially attractive. The restructuring of largestate-owned companies and the growing paceof privatisation are opening up outlets forindustrial machinery. Major deals ear-marked for 2008 include the privatisation ofthe country’s large oil and gas provider, NIS,and the second largest insurer DDOR; thelaunch of motorway, waste treatment andwater management concessions and a seriesof joint ventures in the power sector.■ Means of entryMeasures to open up foreign trade adoptedby the Serbian government have involved

cutting the number of import tariffs from36 to 6, with 8 per cent of goods nowsubject to a ceiling rate of 30 per cent(down from 40). The rates of duty varybetween 1 and 10 per cent for 73 per centof goods and between 1 and 5 per cent for50 per cent of goods.

Technical discussions on reaching a stabi-lisation and association agreement with theEU have ended. Serbia wishes to obtaincandidate country status by the end of 2008.Negotiations are under way in Geneva onWTO accession.

Public procurement legislation passed bythe Serbian parliament in August 2002, 90per cent of which is EU-inspired, is still inforce. Open tendering is well establishedthroughout Serbia and should, in theory,lead to greater transparency.

■ Attitude towards foreign investorsThe country has a very open attitude toforeign investors. The 2001 privatisation act,the 2002 foreign investment act establishingequal rights between foreign and local inves-tors and simplifying start-up formalities,banking sector restructuring, tax incentives(at 10 per cent, corporation tax is one of thelowest in the region) and cheap skilled labourmake Serbia one of the most tax friendlycountries in the region.

SERBIA

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1

Serbia has signed and ratified CEFTA.Thefree-trade agreement with Russia is still ineffect, opening up a potential market of 150million consumers to locally established com-panies alone.

However, a number of basic laws are stillto be passed (bankruptcy, commercial courts,accounting standards). Property law remainsopaque and court decisions are lengthy.

■ Foreign exchange regulationsSerbia has kept the dinar (CSD) as thenational currency. Since 2002, the dinar isconvertible and foreign exchange for inter-national settlements freely available to indi-viduals and companies. In early 2006, thedinar traded at CSD86 to the euro. It hassince strengthened and in October 2007 wastrading at CSD76 to the euro.

EUROPE AND THE CIS

118

OPPORTUNITY SCOPE



Mn USDMn USD


Italy GermanyBosnia RussiaMontenegro,Rep.

GermanyRussia China RomaniaItaly

EXPORTS by products 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%

■ Metals 24%■ Chemicals and plastics 16%■ Foodstuffs 11%■ Textile and clothing 7%■ Wood, paper 4%■ Machinery and equipment 8%■ Other 32%

0100200300400500600700800

0

500

1000

1500

2000



Indicators Serbia Regional averageEmergingcountry average

GNP per capita (PPP dollars) 7,029 1,1613 5,983GNP per capita (USD) 4,206 6,859 2,313Human Development Index n/a 0.772 0.672Wealthiest 10% share of national income 23 28 31Urban population percentage 52 62 44Percentage under 15 years old 18 20 30Number of computers per 1,000 inhabitants 48 122 50

SLOVAKIA

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1

SlovakiaPopulation (million inhabitants): 5.4GDP (US$ million): 55,049


STRENGTHS• EU membership has been a catalyst of

reform.• With robust growth and an easing

current account deficit, the country isreaping the benefits today from theinvestments made in the automotive andelectronics industries.

• A limited level of inflation and reductionof the public sector deficit should allowSlovakia to join the euro zone in 2009.

WEAKNESSES• The economy’s dependence on car exports

could undermine growth in case of asharp slowdown of foreign demand.

• Although FDI inflows remain relativelystrong, foreign debt, notably in the formof short-term bank deposits, has beengrowing.

• The participation in the government ofpopulist formations does not augur wellfor marked progress on reforms.

RISK ASSESSMENTIncreased production capacity, particularlyin the automotive industry, spurred growthin 2007 and facilitated reducing externaldeficits. Household consumption benefited,meanwhile, from rising real wages and theexpansion of credit. Investment remaineddynamic despite the limited increase inpublic capital spending and the completionof new car factories. In this context, corporatesolvency remained generally satisfactoryeven with a deterioration of risk in sectorslike textiles, food and wood. Growth shouldbe slower in 2008 with production start-up ofnew facilities having peaked in 2007. Al-though weakening slightly,domesticdemandwill benefit from the firmness of corporateearnings, direct investment and the growthof household income. Export dynamism, cou-pled with an import slowdown, should resultin further improvement in external accounts.

The fiscal deficit should ease to under 3per cent of GDP by end 2007, thanks to

increased public sector revenues. Further-more, the limited increase in regulated en-ergy prices and the appreciation of theexchange rate since mid-2006 have resultedin a decline of inflation. The government ison the verge of meeting the Maastrichtcriteria, which should allow Slovakia to jointhe euro zone in January 2009 as expected.EU officials will nonetheless have to assessthe durable character of the improvements.Rising world prices are likely to stoke infla-tion in 2008, and the government will haveto demonstrate the extent of its control overpublic spending.

Although the government coalition led bythe left-wing party Smer, in power since mid-2006, has revised certain reforms (labourmarket, health, pensions), it will be unlikelyto go back on the essential features ofmeasures adopted by the preceding majority,since it is intent on joining the EuropeanMonetary Union as soon as possible andpreserving the country’s attractiveness toinvestors.

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USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.8 5.2 6.6 8.5 9.0 7.0Inflation (%) 8.4 7.5 2.8 4.3 1.9 2.3Public sector balance (%GDP) -2.7 -2.4 -2.8 -3.7 -2.9 -2.5Unemployment (%) 17.5 18.1 16.2 13.3 11.8 n/aExports 21.9 27.6 31.9 41.9 54.2 69.7Imports 22.5 29.2 34.3 44.9 56.4 70.1Trade balance -0.6 -1.5 -2.4 -3.1 -2.3 -0.3Current account balance -2.0 -3.3 -4.0 -4.6 -3.4 -2.7Current account balance (%GDP) -5.9 -7.8 -8.4 -8.2 -4.7 -3.1Foreign debt (%GDP) 54.4 56.3 56.5 57.6 54.3 49.1Debt service (%Exports) 14.2 10.7 11.2 4.9 4.5 4.0Foreign exchange reserves (in months of imports) 4.9 4.8 4.3 2.8 3.1 2.8



■ Market overviewThe job situation in the country is improving,with unemployment falling from 16.2 percent in 2005 to 13.3 per cent in 2006 and to11.1 per cent in the first half of 2007. Butthere are still extremely wide regional dis-parities. Despite substantial wage increasesin the past few years, the average monthlywage is only about €550 and the minimumwage €225. The socialist government hassuspended the privatisation programme forthe duration of its four-year term. Conse-quently, the railways, rail freight manage-ment and local authority-administeredurban heating are to remain the property ofthe Slovak state or of local authorities. Whilethe expanding consumer goods market pro-vides many business opportunities, capitalgoods supply and industrial cooperation pro-jects clearly offer the best growth prospects.The latter can take the form of subcontract-ing, manufacture under licence or, moreimportantly, locally based joint ventures.

■ Means of entryIndustrial products are allowed in duty-freeand the exceptional arrangements in respectof farm products have been abolished. TheSlovak customs code has adopted in full theEuropean harmonised code, the commonexternal tariff applicable tonon-EUcountriesand the procedures (declaration of traded

goods) in respect of intra-EU trade. The mostwidely used means of payment are SWIFTtransfers and documentary credit. Disputesand litigation are relatively rare.

■ Attitude towards foreign investorsSlovakia’s resolutely liberal legislation per-mits foreign investors to wholly own a localcompany, with a 34 per cent stake constitut-ing a blocking minority. The law establishesequality of treatment between Slovak andforeign investors. The Slovak Investmentand Trade Development Agency, SARIO(Slovenska agentura pre rozvoj investıciı aobchodu), is more proactive than before inthe development of the country’s industrialareas. The Fico government has reintroducedrestrictions on foreign shareholdings in so-called strategic sectors (energy, etc) andfrozen the sale of the government’s stake inpartially privatised enterprises, mainly inthe power sector. However, the government’srefusal to increase public debt offers goodconcession and purchasing power parity(PPP) opportunities, despite the loopholes inSlovak legislation regarding institutionali-sed PPPs.

■ Foreign exchange regulationsSince the abolition of exchange controls andthe introduction of a new banking law, thetrend is towards greater simplification offoreign commercial transactions. On 28 No-vember 2005, Slovakia joined the second

SLOVAKIA

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1

phase of EMU. Since March 2007, the Slovakkoruna’s central rate versus the euro isSKK35.4424 to the euro, with a fluctuationmargin of ±15 per cent. In actual fact, thecurrency is trending upwards and at 1November 2007 traded at SKK33.30 to theeuro. Entry into the euro area on 1 January

2009 is one of the priorities of the Ficogovernment, which is sparing no effort tocomply with the Maastricht criteria. If thepolicy succeeds, the final exchange rate willbe a key factor in the country’s futurecompetitiveness.

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

0

50

100

150

200

250

300

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDSlovakia

EUROPE AND THE CIS

122

OPPORTUNITY SCOPE



Mn USDMn USD


CzechRepublic

Poland AustriaAustria HungaryGermany Italy CzechRepublic

Germany Russia

EXPORTS by products IMPORTS by products■ Electrical and mechanical equipment 32%■ Metals 13%■ Chemicals 10%■ Fuels 10%■ Vehicles 8%■ Foodstuffs 5%■ Other manufactured goods 11%■ Other 12%

■ Electrical and mechanical equipment 35%■ Vehicles 17%■ Metals 11%■ Chemicals 6%■ Base products and gasoline 6%■ Foodstuffs 3%■ Other manufactured goods 11%■ Other 11%

0

2000

4000

6000

8000

10000

12000

0

2000

4000

6000

8000

10000



Indicators Slovakia Regional averageEmergingcountry average


SLOVENIA

123

1

SloveniaPopulation (million inhabitants): 2.0GDP (US$ million): 37,303


STRENGTHS• The country has enjoyed strong GDP

growth and boasts the highest per capitaincome in Central Europe.

• Its industry is both diversified – carmanufacturing, electric appliances,pharmaceuticals, metal processing andpaper products – and mostly export-oriented, which largely reflects the solidties long established between local andWest European companies.

• Slovenia has a limited external deficit.• The country’s integration into the euro

zone in January 2007 rewarded its tightmanagement 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 bearwatching.

• Slovenia’s competitiveness could sufferfrom an excessive real exchange-rateappreciation. A low level of FDI hashampered modernisation of theproductive apparatus.

• The ageing population constitutes apotential risk for public sector finances.

• Progress on labour market reform andprivatisation has been lagging.

RISK ASSESSMENTThe economy continued to grow strongly in2007, underpinned mainly by investmentdynamism particularly in the constructionsector (infrastructure and housing). Privateconsumption remained strong spurred byrising employment and tax reductions. Asharp rise in imports was nonetheless re-sponsible for a negative foreign trade contri-bution to GDP growth. Exports, boosted bythe country’s integration into the euro zonein January 2007 and rising sales in the carindustry continued, however, to grow at ahigh rate. In this buoyant economic context,the Coface payment incident index remainedwell below the world average.

Growth should slow slightly in 2008 witha reduction of investment likely as a resultof the marked expansion of production capac-ity achieved in recent years, the worldeconomic slowdown and a probable deceler-

ation in housing construction. The importslowdown that should also result, however,will lead to a reduction in the externalaccount deficit. The conjunction of wagegrowth and an economic slowdown shouldcause the public sector deficit to widenslightly. Government debt will, however,remain stable at a very moderate level,representing 27 per cent of GDP. Inflationshould not ease much, meanwhile, amid thewage pressure and rising prices for commod-ities and energy. Despite an expected in-crease in the proceeds from privatisation, netFDI inflows will remain low with a furtherincrease in foreign debt a likely consequence.

The centre-right government coalition,which survived a no-confidence vote after thedefeat of its candidate in the November 2007presidential election, should be able to stayin power until the legislative elections sched-uled in autumn 2008.

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USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.8 4.4 4.1 5.7 5.6 4.6Inflation (%) 5.6 3.6 2.5 2.5 3.2 3.0Public sector balance (%GDP) −2.7 −2.3 −1.5 −1.2 −0.9 −1.5Unemployment (%) 11.2 10.6 10.1 9.4 7.8 8.0Exports 12,916 16,065 18,146 21,327 28,184 34,760Imports 13,539 17,322 19,404 22,814 30,218 36,640Trade balance −622 −1,258 −1,258 −1,487 −2,034 −1,880Current account balance -216 −893 −681 −1,104 −1,429 −1,240Current account balance (%GDP) −0.8 −2.7 −1.9 −2.9 −3.2 −2.4Foreign debt (%GDP) 53.2 58.4 71.0 79.5 86.6 91.4Debt service (%Exports) 14.9 13.1 14.8 17.6 18.3 20.1Foreign exchange reserves (in months ofimports)

6.2 5.0 4.1 3.1 2.9 2.8



■ Means of entryWhile there are no longer any tariff barriers– the rules of the internal market applyingin full since 1 May 2004 when Sloveniaentered the EU – various non-tariff barriersremain in place, necessarily narrowing ac-cess to the home market. Stringent inspec-tions and tests are regularly carried outduring a product’s – especially foodstuffs –release on the market by the relevant au-thorities ostensibly to protect the consumer.It is still necessary to translate all customerinformation notices and leaflets into Sloven-ian, even though the majority of the popula-tion speaks English. Regarding publicprocurement, the cartelisation of some sec-tors (construction and public works in partic-ular) restricts market access for foreignplayers with the tacit support of local firms.This problem affects not only public procure-ment but also consumer goods, as evidencedby the dominance of a small group of organi-sed retailers in the award of new contracts.

Slovenia appears to be lagging behind itsneighbours in Visegrad in terms of competi-tiveness. This is reflected in market sharewon in Western Europe and across theOECD. According to Slovenian employers,while sizeable hourly productivity gainshavebeen achieved in manufacturing, thanks to

more focused investment and better manage-ment of industrial tools and manpower, thestronger job market is putting upward pres-sure on wages. Recruitment of foreign man-power, much favoured by the country’sbusiness community, continues to be re-stricted by employment regulations andhardly extends beyond construction andheavy industry.

It is in the Balkans and further to the eastwhere the investments and the market pen-etration strategy of Slovenian companies areconcentrated, and where the success story ofSlovenian foreign trade lies. Trading rela-tions with Russia and Ukraine are alsoexpanding rapidly.

■ Attitude towards foreign investorsIt has to be said that Slovenia has not reallyreceived much in the way of foreign invest-ment these last few years. According to theBank of Slovenia, at end-2004 aggregate FDIinflows came to a mere €5.6 billion. In 2004,they amounted to €662 million and in 2005to €427 million. The policy of attracting FDIwas revived in 2006 with the reform of theSlovenian investment support agency,JAPTI.

The government has relaunched its pro-gramme to privatise steel and telecommuni-cations – a key component of the structuralreforms announced in October 2005 – but so

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far only steel’s privatisation has been com-pleted in a sell-off to a Russian family group.The government’s refusal to let Belgianminority shareholder KBC take over Slove-nia’s leading bank, Nova Ljubljanska Banka(NLB), is an excellent illustration of its foot-dragging attitude on the matter. In a numberof competitive sectors, the two public invest-ment funds, KAD (Kapitalska druzba, Pen-sion Fund Management) and SOD(Slovenska odskodninska druzba, Slovenianreimbursement Fund), are selling off theirminority stakes. Groups like Gorenje (elec-trical appliances) Krka (pharmaceuticals),Petrol (hydrocarbon supply) and Intereuropa(logistics and transport) already have foreignminority shareholders, but with low stakes(under 15 per cent).

Greenfield investments are welcomed butlimited by the narrowness of the homemarket and poor Central European andBalkan regional competitiveness. Sloveniafares very badly on the ease of doing business

index. It takes about three to four months tostart up a company. Market access may bringgrowth opportunities, but it is also subject toa heavy administrative burden, not to men-tion fairly steep wage costs and high corpo-ration tax (undergoing reform). An ambitioustax reform came into effect in 2007 andpayroll tax continues to be cut in a phasedmanner.

■ Foreign exchange regulationsSlovenia entered the euro area as plannedand without incident on 1 January 2007. Thetolar is pegged to the euro at a fixed rate of239.64 tolars to the euro. Henceforth, thecountry’s sole instruments of economic policyare budgetary and wage adjustments, theBank of Slovenia having joined the Europeansystem of central banks. Entry into thissystem has not been accompanied by aninflationary surge as many sectors, includingorganised retail, signed a price moderationagreement on that occasion.


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OPPORTUNITY SCOPE



Mn USDMn USD


Italy Austria CroatiaFrance FranceGermany Croatia ItalyGermany Austria

EXPORTS by products 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%

■ Metals 15%■ Vehicles 14%■ Mechanical machinery and equipment 13%■ Electrical machinery and equipment 11%■ Pharmaceutical products 7%■ Other chemicals 7%■ Furniture 6%■ Other 28%

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Indicators Slovenia Regional averageEmergingcountry average


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SpainPopulation (million inhabitants): 44.5GDP (US$ million): 1,230,600


STRENGTHS• The economy has benefited from the

growth of the working populationgenerated by the increasing proportion ofwomen employed and by immigration.

• Public investment in infrastructurefinanced by European subsidies hascontinued and allowed the country tomake up lost ground in communicationnetworks.

• The public finance surplus is attributableto both the economic growth and thesurplus positions of social securityaccounts generated by the growth ofemployment.

• The continuing development of regionalautonomies has made local players moreresponsible and brought decision makerscloser to the general public.

• Spain’s close ties and common languagewith a large part of the Americas holdpromise for the future.

• Spain remains a leading touristdestination.

WEAKNESSES• The large role played by residential

construction in the economy constitutes arisk in case of a downturn.

• The shortcomings of the educationsystem, the failure to adequately trainthe vast reserves of temporary workersand the inadequacy of research anddevelopment have resulted in limitedproductivity gains.

• Low productivity, inflationary pressuresand positioning on products withinsufficient value added to meet Asianand East European competitioneffectively has undermined the overallcompetitiveness of the products andservices offered by the country.

• The outlook for many industrial sectorswill depend on decisions taken by foreignmultinationals increasingly attracted bymore competitive locations.

• The management of water continues tobe a problem due to its immoderate usein agriculture and its uneven distributionamong the various regions.

RISK ASSESSMENTThe economy remained very dynamic in2007, despite the incipient slowdown ofresidential construction and household con-sumption. Investment by companies andpublic institutions was up sharply, againthanks to their good financial health. Evenwith the trade deficit remaining large, theforeign trade contribution was less negativedue to good export and tourism performance.

The Spanish economy should make a softlanding this year attributable to the decline

of residential construction and a furtherslowdown of private consumption. The trendwill nonetheless remain consistent with theeconomy’s potential. The downturn of resi-dential investment and housingpricesshouldnonetheless be limited by continued strongdemand from foreign tourists and immi-grants (40 per cent of the total) and thelimited supply of rentals. Consumption willsuffer from the upsurge in inflation spurredby the increasing cost of energy and food.Growing unemployment, the result of both a

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more sluggish job market and the growth ofthe working population attributable to im-migration and an increase in the proportionof actively employed women, will also be anegative factor. Other factors will, however,cushion the effects of the downturn, particu-larly the comfortable net worth positions stillenjoyed by households along with financialsupport extended by the government in theform of rental subsidies for youth and low-income families, increases in low pensionsand income tax reductions made possible bygood public-sector financial health. Althoughcorporate investment in facilities and build-ings will slow, that will be partly offset bycontinued public spending on infrastructureunder a multi-year modernisation pro-gramme (Strategic Plan for Infrastructuresand Transport or Plan Estragetico de Infras-tructuras y Transporte, PEIT). The consid-erable development of research anddevelopment programmes intended to rem-edy the lack of competitiveness will also

serve as a shock absorber. Exports willcontinue to develop at a rate close to that ofworld trade and remain relatively unaffectedby the American slowdown.

Payment behaviour that has been satisfac-tory until now – notwithstanding a fewsetbacks in textiles, small electric equipmentor computer assembly – could deteriorate.Already in 2007, the bankruptcy trendturned slightly up in the third quarter, andthen, towards year end, the Coface paymentincident index showed some deterioration.The smaller, often debt-burdened companiesassociated with the housing market (lightwork, real estate agencies, promoters, man-ufacturers and distributors of material andfurnishings for the home) that have prolifer-ated in recent years would then be the mostexposed. Road transport could, however,suffer from rising petrol prices while the carindustry will have to contend increasinglywith competition from Eastern Europe andthe sluggishness of domestic vehicle sales.


Percentage 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 3.1 3.3 3.6 3.9 3.8 2.8Consumption (var.) 2.8 4.2 4.2 3.7 3.2 2.7Investment (var.) 4.1 4.4 9.0 10.4 11.6 6.5Inflation 3.1 3.1 3.4 3.5 2.7 3.2Unemployment 11.0 10.5 9.2 8.5 8.2 8.6Short-term interest rate 2.3 2.1 2.2 3.3 4.3 4.2Public sector balance (%GDP) −0.2 −0.2 1.0 1.8 1.6 0.9Public sector debt (%GDP) 48.7 46.2 43.0 40.0 37.0 35.0Exports (var.) 3.6 4.2 2.6 5.1 5.2 5.0Imports (var.) 6.1 9.5 7.7 8.3 6.8 5.5Current account balance (%GDP) −4.0 −5.9 −7.4 −8.8 −9.4 −9.6



■ Automotive industryThe automotive industry represents 6.0 percent of GDP, 11 per cent of jobs and 24 percent of exports. The sluggishness of thedomestic market, a trend likely to continuedue notably to the expiry of the PreverProgramme, has been offset by successesachieved in several major Europeanmarkets.With the transfer of vehicle assembly opera-

tions to Eastern Europe, Asia and Turkeycontinuing, the parts segment will go forwardwith restructuring via capacity and costreduction measures. Much will dependon the willingness of the parent companiesto continue to invest in research anddevelopment in their Spanish factories. Thissector will thus bear watching with anincrease in payment defaults being an appre-ciable risk.

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■ Food distributionDespite recent acquisitions activity, with thetakeover of number four Caprabo by numberthree Eroski and of number 13 Plus by theleader Carrefour, the sector is still relativelyfragmented with the five leaders represent-ing only half the sales premises – and amongthe five leaders there are two foreign players.Regional chains continue to play an impor-tant role. The supermarket format has hadthe greatest development (55 per cent of thetotal) with megastores, discount and smallretailers representing 15 per cent each.Sector business has grown substantially inrecent years but the growth should slow thisyear in phase with consumption.

■ ConstructionThe downturn in the residential market isunder way. It is too early to say how severeit will ultimately be. Companies saddled withheavy debt, recently created or havingachieved spectacular development in recentyears, with a strong presence on the seacoastand in leisure homes, must be carefullysupervised. The same applies to those whoworked for the now bankrupt Valencia com-pany Llanera. Besides construction strictlyspeaking, vigilance is also in order withactivities associated with ceramics, glazing,furniture, wood, doorframes, piping and soon.

■ Information technology industryDue to the low penetration rate of computersin Spanish households with 57 per centowning a computer compared to 75 per centin the United States, the sector continues togrow steadily. Competition in both price andinnovation terms has been intense includingat the distribution stage. Growth will slowthis year along with consumption.

■ PaperIn a phase of strong growth in both produc-tion and sales terms, and of production atfull capacity particularly in paper and card-board packaging, most paper industry seg-ments posted profits in 2007. In 2008, thesector will be faced with challenges thatcould affect profitability and volume, amongwhich the expansion of emerging markets,

the increasing cost of energy and raw mate-rial and obligations agreed under the Kyotoprotocol.

■ ChemicalsProduction should continue grow at a goodclip (up 4.6 per cent). Although the progres-sion of exports will ease to 5.3 per cent, theywill still absorb 53 per cent of total produc-tion. The sector will be able to cope with theincertitude surrounding the future oil pricetrend and the additional costs generated bycompliance with the Registration, Evalua-tion, Authorisation and Restriction of Chem-icals (REACH) directive (between 6 and 20per cent of the cost of production).

■ Textiles and clothingThe textiles and clothing sector employs 7.0per cent of the work force and represents 4.0per cent of GDP and 4.5 per cent of exports.While it seemed the sector had weatheredthe worst of the crisis in 2006–2007, at thisjuncture 2008 is shaping up as a difficultyear, with elimination of European barriersto imports from Asia and maintenance foranother year of American protective meas-ures. The shock will not, however, be as greatas in 2005, thanks to higher productivity, anupward export trend, and the increasingparticipation of sector companies in techno-logical development programmes. Under apublic support programme the sector willbenefit from appreciable aid not only finan-cial and industrial in nature but also ontraining and employment until end 2008.


■ PaymentThe bill of exchange is frequently used forcommercial transactions in Spain. In theevent of default, it offers creditors certainsafeguards, including access to the new‘exchange procedure’ (juicio cambiario) intro-duced by the recent civil procedure rulesunder which, based on his appraisal of thedocuments submitted, a first instance judge(juzgado de primera instancia) may order adebtor to pay within 10 days and have his orher property attached. Where a claim iscontested, a court hearing is held to examine

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both parties’ arguments and a judgementhanded down within 10 additional days ofsaid hearing. Widely accepted though some-what difficult to obtain, the bill of exchangeguaranteed by a bank limits the risk ofpayment default by offering creditors addi-tional recourse to the endorser of the bill.The cheque, which is less widely used thanthe bill of exchange, offers similar legalsafeguards under the ‘exchange procedure’(procedure cambiaire) in the event of default.

The same is true of the promissory note(pagare), which, like the bill of exchange, isan instrument enforceable by law. However,defaults on this instrument are not recordedin the RAI (Registro de Aceptationes Impa-gadas). An outgrowth of the Centre forInterbank Cooperation, the RAI is the mostimportant registry at the national level,where the payment defaults of commercialcompanies are recorded and where banksand other deposit institutions can check acompany’s payment record before extendingcredit.

The RAI was sanctioned by the Tribunalde Defensa de la Competencia in February2005 for undermining competition as regardsfree access to its files by interested thirdparties. Electronic transfers via the SWIFTnetwork, widely used by Spanish banks, area quick, fairly reliable and cheap instrument,provided the purchaser, in good faith, orderspayment. If the buyer fails to order a transfer,the legal remedy consists in institutingordinary proceedings, or a summary proce-dure based simply on an unpaid invoice.

■ Debt collectionCollection begins with formal notice servedby recorded delivery letter inviting thedebtorto pay, within 10 days, the principal in-creased by any past-due interest set by theparties. Barring special clauses included inthe commercial contract, the applicable ratesince 31 December 2004, is the interest rateapplied by the European Central Bank in itsmost recent refinancing operation performedprior to the first calendar day of the half yearconcerned, increased by seven percentagepoints.

Semi-annually, the Finance Minister pub-lishes the rate thus determined in the BoletınOficial del Estado. Where there is a lack ofsettlement agreement with the customer, thecreditor will initiate a legal collection processby reference to the recent law on civilprocedures (ley de Enjuiciamento civil)whichcame into force on 8 January 2001. The rulescut the time taken up by litigation signifi-cantly and give oral arguments priority overwritten submissions – the cornerstone of theprevious system – even though the authen-tication of large numbers of documents re-mains a requirement.

Besides the ‘exchange procedure’, a sellerunable to settle with a buyer out of court, mayenforce his right to payment through the newcivil procedure (juicio declarativo), dividedinto ordinary proceedings (juicio ordinario)for claims over €3,000 and oral proceedings(juicio verbal) for smaller claims. The aim ofthe new procedure is to speed up delivery ofenforcement orders by reducing and simpli-fying the stages of the old procedure.

In addition, for monetary claims for anoverdue and payable amount under €30,000,creditors now benefit from a more flexiblespecial procedure (juicio monitorio); thissystem does not require the presence of abarrister or solicitor to file a peticion inicial,prepared with a pre-printed form and sub-mitted to the judge of first instance (juzgadode primera instancia) who may, after review-ing supporting documents, order the debtorto pay within 20 days. This innovative law,with the notable establishment of a summaryprocedure, has been progressively gainingacceptance and breaking with the traditionof formalism cultivated by the Spanish judi-ciary for many decades.


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Spain

SWEDEN

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SwedenPopulation (million inhabitants): 9.1GDP (US$ million): 384,927


RISK ASSESSMENTThe economy continued to grow strongly in2007 despite the beginning of a slowdown inthe fourth quarter. Investment was verydynamic as much by companies faced withexhaustion of their production capacity as bypublic institutions and by households whosespending on construction increased sharply.

Although the slowdown should continue in2008, GDP growth could nonetheless reach 3per cent. Exports will be hampered by unfa-vourable exchange rates and the demandslowdown in North America and to a lesserextent in Europe. Corporate and householdinvestment will be less dynamic due to risingcosts, the restored balance between produc-tion capacity and actual throughput and theincreasing cost of credit. In the face of theinflationary pressures resulting from thestrong growth and the labour shortage in

some sectors, the Riksbank is expected tocontinue its policy of raising interest rates.Household consumption should nonethelessaccelerate slightly in a still-favourable envi-ronment marked by new tax reductions(facilitated by the fiscal surplus) and job andwage growth.

After four years of strong growth, compa-nies in general are enjoying good financialhealth. Bankruptcies continued to decline,easing 5 per cent in the first 10 months of2007 and the Coface payment incident indexfor Sweden remained at an excellent level.Sawmills and the car industry nonethelesshave experienced some difficulties. In elec-tronic product distribution, the competitionintensified with the irruption of GermanMedia Markt. The slight slowdown expectedwill be unlikely to undermine payment be-haviour.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 1.7 4.1 2.9 4.2 3.4 3.0Consumption (var.) 1.8 2.2 2.4 2.8 3.0 3.3Investment (var.) 3.3 6.5 12.9 5.2 12.0 5.0Inflation 2.3 1.0 0.8 1.5 2.0 2.3Unemployment 5.6 6.3 7.4 7.1 6.1 5.8Short-term interest 3.2 2.3 1.9 2.6 3.6 4.3Public sector balance (%GDP) −0.9 0.8 2.4 2.5 2.9 2.6Public sector debt (%GDP) 53.5 52.4 52.2 47.0 41.0 36.0Exports (var.) 4.5 11.1 6.5 8.9 5.5 5.0Imports (var.) 5.0 7.0 7.0 7.9 7.0 6.0Current account balance (%GDP) 6.6 6.5 5.8 7.0 7.1 7.0


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■ PaymentBills of exchange and promissory notes areneither widely used nor recommended asthey must meet a number of formal require-ments in order to be valid. Just as the rulesfor issuing cheques have become more flexi-ble, so the sanctions for issuers of uncoveredcheques have been relaxed over the years.Moreover, the use of cheques has beengradually declining in favour of bank cards.

Conversely, use of the SWIFT electronicnetwork by Swedish banks provides a secure,efficient and fairly cheap domestic and inter-national fund-transfer service. However, aspayment is dependent on the buyer’s goodfaith, sellers are advised to take great careto ensure that their bank account detailsare correct if they wish to receive timelypayment.

■ Debt collectionAs a rule, the collection process begins withthe debtor being sent a final demand byregistered mail asking him to pay, within 10days, the principal amount together with anycontractually agreed interest penalties.

Where there is no specific interest clausein the contract, the rate of interest applicablefrom 1 July 2002 is the Bank of Sweden’s(Sveriges Riksbank) six-monthly benchmarkrate (reporantan), plus eight percentagepoints. Under the Swedish Interest Act(rantelag, 1975, last amended in 2002),interest starts to accrue 30 days after theinvoice date or after a demand for paymentis sent to the debtor by registered mail.

Where claims meet certain requirements– denominated in Swedish krona, certain,liquid and indisputable – creditors canobtainan injunction to pay (Betalningsforelag-gande) within more or less four months fromthe Enforcement Service, set up since 1January 1992. This Enforcement Service(Kronofogde-myndigheten) may order adebtor to settle the claim or justify latepayment within two weeks. If the debtor failsto respond within four weeks, the Officeissues a writ of execution at the creditor’srequest.

While formal, this system offers a rela-tively straightforward and quick remedyin respect of undisputed claims and hasgreatly freed up the courts. Creditors arenot required to engage a lawyer but, insome circumstances, would be well advisedto do so.

Lacking a settlement agreement or whereclaims are disputed, the Enforcement Ser-vice, if contacted previously, will no longerhave jurisdiction over the dispute. Creditorsmust obtain legal remedy through the ordi-nary court process by bringing their claimsbefore a court of first instance (Tingsratt). Itshould be noted that civil courts have alsojurisdiction to hear commercial disputes.

Proceedings involve a preliminary hearingin which the judge attempts to reconcile theparties after examining their case docu-ments, evidence and arguments. If the dis-pute remains unresolved, the proceedingscontinue with written submissions and oralarguments until the main hearing, wherethe accent is on counsels’ pleadings (defenceand prosecution) and examination of wit-nesses’ testimonies.

In accordance with the ’immediacy ofjudgement’ principle, the court bases itsdecision exclusively on the evidence pre-sented at the trial. As a general rule, thecode of civil procedure requires the losingparty to bear all legal costs consideredreasonable as well as the attorney feesincurred by the winning party, beyond agiven threshold claim amount (aboutSEK20,150).

It takes about 12 months on average toobtain a writ of execution in first instance,bearing in mind that there is a widespreadtendency in Sweden to appeal against judge-ments.


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SwitzerlandPopulation (million inhabitants): 7.5GDP (US$ million): 387,800


STRENGTHS• A privileged geographic location, political

and social stability, quality financialservices and a moderate tax system haveattracted investors.

• The presence of large industrial andfinancial groups that are among theworld leaders has underpinned thecurrent account surplus.

• The high density of cantonal and regionalbank networks has fostered thedevelopment of smaller companies.

• The high level of R&D has spurredcorporate competitiveness.

• Limited taxation of legal entities hasfostered the creation of new companies.

WEAKNESSES• Lack of membership in the EU,

notwithstanding the mitigating effect ofbilateral agreements, has hamperedproducts and services trade (customs,shipping restrictions, standards).

• The lack of coordination between theConfederation and cantons on financialand administrative matters has impededreforms.

• Public and private regulations havehampered foreign competition andweighed on corporate productivity.

• Low unemployment and the shortage ofskilled labour have impededdevelopment in certain sectors.

• The continuing equilibrium of publicfinances will require continued efforts onreforms to cope with rising social securitybenefits.

RISK ASSESSMENTDomestic demand and exports drove eco-nomic growth in 2007, with household con-sumption keeping pace with increases inwages and jobs. A particularly marked in-crease in capital goods investment by com-panies largely offset the decline ininvestment in residential construction. Ex-ports continued to benefit not only from thedynamism of trading partners in the eurozone (about 60 per cent of sales abroad) butalso from the Swiss franc depreciation.

In 2008, the growth rate will weaken.Domestic demand will be the main growthdriver with export growth sagging in the

wake of the economic slowdown in the eurozone and the waning stimulatory effect of theweak franc. The services sector will continueto achieve excellent performance throughcommissions generated on financial transac-tions with foreign customers and revenuesderived from international trading and tour-ism. The import slowdown will ease underthe effect of corporate investment demandwith companies needing to increase theirtechnical production capacity and therebyprogressively normalise a very high utilisa-tion rate. The job market will be subject totensions amid exceptionally low unemploy-ment and exacerbation of the shortage of

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skilled labour. Despite inflationary surges,rising wages will continue to support house-hold consumption. The possibility of tighterconditions of access to credit and less attrac-tive interest rates will nonetheless tend toslow the growth of spending. The consolida-tion of public finances will continue with thebudget showing a slight surplus for the thirdstraight year.

Corporate financial health stayed solidlyon track in 2007 with bankruptcies continu-ing moreover to decline (3.4 per cent for thefirst 10 months of 2007). The Coface paymentincident index bears out this very good situa-

tion. Companies have generally been able topass on high raw material costs to customers.Industrial order books grew in 2007 and inthe first months of 2008. Particular attentionshould nonetheless be given to operator ef-fectiveness in managing their increased pro-duction capacity and the shortage ofspecialised labour. This will be particularlythe case in the finance and construction sec-tors. Sectors sensitive to economic conditionslike communications, the furniture industry,home appliances, clothing, leisure and cul-ture will bear watching.


Percentage 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth −0.2 2.5 2.4 3.2 2.5 2.0Consumption (var.) 0.9 1.5 1.8 1.6 2.0 1.9Investment (var.) −1.2 4.5 3.7 4.2 4.1 3.3Inflation 0.6 0.8 1.2 1.1 0.6 1.3Unemployment 3.7 3.9 3.8 3.3 2.8 2.5Short-term interest rate 0.3 0.7 0.9 1.5 2.6 3.0Public sector balance (%GDP) −1.4 −1.2 −0.5 0.5 0.3 0.6Public sector debt (%GDP) 53.5 53.0 51.2 51.0 50.2 49.4Exports (var.) −0.2 7.8 7.1 10 6.8 5.1Imports (var.) 1.3 7.3 6.7 6.9 5.7 5.4Current account balance (%GDP) 13.4 15.1 13.7 17.3 16.0 17.0



■ WatchmakingBy specialising in luxury watchmaking, com-panies have ensured the continuity of theirdomestic and international sales. With ex-port sales up 15 per cent in the first half lastyear, demand has not flagged, with Asia themain market (33 per cent) followed by theEU (28 per cent) and the United States (17per cent) and with the domestic marketrepresenting only 5 per cent of total sales.The large profits made in the past by mostoperators have facilitated compensating forslower price increases.

■ Chemicals-pharmaceuticalsSales to the EU (60 per cent of the total)accelerated in 2007 amid the decline of thefranc, which offset the disappointing turno-

ver generated domestically. Although theexpected economic slowdown in Europe couldslightly affect performance in the industries,the outlook nonetheless remains bright.

■ Mechanical engineeringDemand from the main trading partners,particularly Germany, and the weakness ofthe Swiss franc have underpinned exportgrowth with this performance enhanced bydomestic demand for capital goods. Produc-tion and profits have thus been trending upwith order books in satisfactory shape. Busi-ness conditions should remain buoyant inthe sector this year.

■ TourismThe sector continued to enjoy healthy condi-tions in 2007 with strong foreign demand (up6 per cent in the first eight months last year)

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from German and French neighbours focusedparticularly on large cities, especially Zurichand Geneva. A slight franc appreciation – ifone should develop – or an erosion of growthin the EU will not reverse the favourabletrend for 2008.

■ Building and public worksDespite a marked slowdown, residentialconstruction activity has remained at a goodlevel, while corporate investment in infra-structure has spurred the construction ofindustrial facilities. Rising prices for certainraw materials and increasing payroll costswill squeeze the margins of sector operators.To offset that handicap, many companieshave been increasingly diversifying intohigher value-added services, particularly innew technologies. In the public works seg-ment, the trend for order books has beenrelatively gloomy.


■ PaymentsBills of exchange and cheques are not com-monly used, owing to prohibitive bankingand tax charges; the stamp duty on bills ofexchange is 0.75 per cent of the principalamount, for domestic bills and 1.5 per centfor international bills. Similarly, commercialoperators are particularly demanding asregards the formal validity of cheques andbills of exchange as payment instru-ments.Domestic and international paymentsare commonly made by bank transfer, espe-cially via the SWIFT electronic network towhich the major Swiss banks are connectedand which provide speedy and efficient proc-essing of payments at low cost.

■ Debt collectionThe Swiss legal system presents technicalspecificities, as follows:

The existence of an administrative author-ity (eg Office des poursuites et des faillites orBetreibungs und Konkursamt) in each cantonwhich is responsible for executing courtorders and whose functioning is regulated byfederal law. Interested parties may consultor obtain extracts of the Office’s records.

Specific rules for legal procedure prevail ineach canton (there are 26 different codes of

civil procedure), which sometimes varygreatly depending on the legal doctrine thathas inspired them. As such, before instigat-ing actions, plaintiffs should ensure thattheir counsel is familiar with the law of theconcerned jurisdiction as well as the lan-guage to be used before the court (French,German or Italian).

With those constraints impeding the jus-tice system’s speed and effectiveness, a com-mission of experts has developed a proposalfor unifying the various civil procedures thatwill be submitted to parliament in the future.The proposal notably stipulates that theparties must make an attempt at conciliationor submit to mediation before requesting ahearing before the court of competent juris-diction.

The debt collection process commenceswith the issuing of notice to pay by ordinarymail or registered letter (thus enabling inter-est penalties to be charged). This gives thedebtor two weeks in which to pay theprincipal amount, plus – unless otherwiseagreed by the parties – interest penaltiesequivalent to the bank rate applicable in theplace of payment.

In the absence of payment, the creditorwill submit a duly completed and signedpetition form (requisition de poursuite) to theEnforcement and Bankruptcy Office (Officedes poursuites et des faillites), which thenserves the debtor with a final order to paywithin 20 days. While very easy to use bycreditors, that procedure nonetheless per-mits debtors to oppose the order within 10days of being served, without having toprovide grounds. In such case, the onlyalternative for creditors is to seek redressthrough the courts.

Conversely, where a seller holds uncondi-tional proof of debt signed by the buyer (anyoriginal document in which the buyer recog-nises his debt, bill of exchange, cheque, etc),he may request the temporary lifting of thedebtor’s opposition (main levee del’opposition) without having to appear beforethe court. This is a summary procedure,quick and relatively easy to obtain, in whichthe court’s decision is based upon the docu-ments submitted by the seller.

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Once this lifting order has been granted,the debtor has 20 days in which to refer thecase before the judge to obtain the debt’srelease (liberation de dette) and, in turn,obtain an executory order. This entails initi-ating a formal procedure – with a writtenphase and an oral examination of witnessesduring court hearings – lasting from one tothree years depending on the canton. Legalcosts vary widely depending on the ratescharged by the various cantons.

Once the court hands down a final ruling,the Enforcement and Bankruptcy Office de-livers an execution order or, in the case oftraders, a winding up petition (commina-tion). In all cases, the law decides whichmeasure – execution order or winding up

petition – is applied. Either a court of firstinstance or a district court hears legal pro-cedures. Commercial courts, presided by apanel of professional and non-professionaljudges, exist in four Germanic cantons: Aar-gau, Berne, Saint-Gall and Zurich.

Once an appeal has been lodged with thecantonal court, as a last resort for claimsexceeding CHF30,000, cases are heard bythe main federal judicial institution, theSwiss Federal Court (Tribunal federalSuisseor Schweizerisches Bundesgericht), in Lau-sanne – the other judicial institutions arethe Federal Criminal Court located in Bellin-zone, which was set up in April 2004, andthe Federal Administrative Court scheduledto begin operations in January2007, inSaint-Gall.


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TajikistanPopulation (million inhabitants) 6.7GDP (US$ million) 2,811


RISK ASSESSMENTAfter a long decline due in part to the civilwar that lasted from 1992 to 1997, theeconomy has been growing strongly eversince, up 9.0 per cent a year on average from2000 to 2006. But only in 2008, will GDPreturn to its level of 1992, with Tajikistanremaining the poorest country in the CIS(Community of Independent States).

Growth exceeded 7.0 per cent in 2007.Transfers from expatriate workers, the coun-try’s main source of foreign exchange repre-senting 20 per cent of GDP, haveunderpinned consumption and investment.The country has moreover benefited from thedemand 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-independ-ence harvest due to both a lack of investmentin irrigation and severe droughts in recentyears.Growth should remain high in 2008but remain dependent on sales of aluminium,cotton and electricity.

The transit of opium from neighbouringAfghanistan – 1,000 metric tons a year byUnited Nations estimates – has also stimu-lated domestic demand with Tajikistan thescene of 90 per cent of drug seizures in Asia.This traffic breeds violence and corruption ina country still riven by profound cleavagesbetween clans. In office since 1992, PresidentImomali Rahmon (formerly “Rahmonov”), re-elected for seven years in November 2006,has nonetheless tightened his grip on powerwith the opposition weak and divided.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 10.2 10.6 7.5 7.0 7.2 7.4Inflation (%) 13.7 5.7 7.1 12.7 9.8 8.5Public sector balance (%GDP) 0.9 0.7 0.5 0.8 0.4 0.4Exports 906 1,097 1,108 1,512 1,736 1,783Imports 1,026 1,232 1,431 1,955 2,357 2,491Trade balance −120 −135 −323 −443 −621 −708Current account balance (%GDP) −0.3 −2.7 −0.8 −0.8 −3.0 −3.5Foreign debt (%GDP) 63.7 39.7 38.4 30.6 40.3 50.5Debt service (%Exports) 8.4 33.9 17.4 13.1 16.2 16.4Foreign exchange reserves (in months ofimports)

1.9 1.8 2.1 2.0 2.1 2.3


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TurkeyPopulation (million inhabitants): 72.9GDP (US$ million): 402,710

Country @rating: BMedium-term rating: Moderately high riskBusiness climate rating: A4

STRENGTHS• The tight fiscal policy maintained by the

government since the 2001 financialcrisis has resulted in a significant easingof sovereign risk.

• The banking sector has undergoneprofound restructuring.

• Improving significantly in recent years,especially in the negotiating frameworkwith the European Union, the businessclimate is now generally satisfactory.

• Dynamic and flexible, Turkish companieshave held up well to shocks in the past.

• Certain sectors like the automotiveindustry or kitchen appliances have beenvery competitive.

WEAKNESSES• With the oil bill and the influx of

intermediate goods imports widening thecurrent account deficit, Turkey has thelargest external financing needs of anyemerging country.

• A large stock of volatile capital – short-term debt, portfolio investment – makesTurkey very sensitive to sentiment infinancial markets.

• Competition from Asian countries haspartly weakened the textile sector.

• Relations between the government andthe army continue to be a source ofuncertainty, particularly on thesecularism issue.

• A large-scale incursion in IraqiKurdistan would significantly underminerelations with the United States.

RISK ASSESSMENTThe Turkish economy was up 4 per cent in2007, the slowest rate since the 2001 crisis.The summer drought affected agriculturalproduction. The lira appreciation against thedollar appears to have particularlyhamperedcompanies as evidenced by further deterio-ration of external accounts. Domestic de-mand, meanwhile, has felt the effects of thetightening of monetary policy implementedin May 2006. Corporate payment behaviourdeteriorated slightly in this context albeitremaining near the world average.

An easing of monetary policy this yearcould result in somewhat higher growth, butthe external constraint remains the mainweakness. The current account deficit could

approach 8.0 per cent of GDP compared to7.7 per cent a year earlier. Although FDIinflows have covered an increasing propor-tion of financing needs, the large stock ofvolatile capital – short-term debt, portfolioinvestment – raise the spectre of suddencapital flight. A possible crisis of confidencein the lira would undermine the solvency ofcertain companies carrying debt denomi-nated in foreign currencies, with debt in theprivate sector, unlike the public sector, hav-ing increased markedly in recent years.

The prospect of greater stability fosteredby last summer’s legislative and presidentialelections has, however, reduced the risk ofdomestic factors precipitating a crisis ofconfidence in the markets. Sovereign riskhas moreover eased considerably since 2001.

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USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.8 8.9 7.4 6.1 4.0 5.0Inflation (%) 18.4 9.3 7.7 9.7 7.0 5.4Public sector balance (%GDP) -11.7 -4.7 -0.2 -0.4 -1.8 -1.6Exports 51.2 67.0 77.0 91.6 107.1 124.3Imports 65.2 90.9 110.5 131.5 153.7 179.1Trade balance -14.0 -23.9 -33.5 -39.9 -46.6 -54.8Current account balance -7.9 -15.6 -22.8 -31.3 -38.8 -48.2Current account balance (%GDP) -3.3 -5.2 -6.3 -7.8 -7.8 -8.0Foreign debt (%GDP) 59.6 53.4 48.7 54.6 51.7 48.8Debt service (%Exports) 42.9 32.8 35.0 30.9 34.6 24.4Foreign exchange reserves (in months ofimports).

5.0 3.9 4.6 4.8 4.6 4.4



■ Means of entryThe Turkish market is open to foreign goodsand services. The customs union with theEuropean Union covers all sectors of theeconomy, except for unprocessed agriculturalproducts and services. Turkish companiesare particularly keen to enter into partner-ships and joint ventures. All means of pay-ment are used and accepted. Documentarycredit is strongly recommended for initialtransactions and during periods of economicinstability. It may be opened with a foreignbank, although Turkish companies generallyprefer their own banks. Documentary accep-tance credit is the most widely used instru-ment. However, because of its cost, cashagainst documents or payment against goodsare often preferred by Turkish importers.Several inspection companies of interna-tional standing have offices in Turkey.

■ Attitude towards foreign investorsOn 5 June 2003, Turkey’s Grand NationalAssembly passed a law regulating FDI in thecountry. The law limits the number of admin-istrative restrictions and approvals and pro-tects the rights of foreign investors. Article 1of the law aims to encourage FDI, protect therights of foreign investors, harmonise thedefinitions of investment and investor with

international standards and replace the sys-tem of prior authorisations and approvalswith a new information system. The mini-mum threshold of US$50,000 for foreigninvestors has been abolished as has theobligation to obtain prior approval from theDirectorate General for Foreign Investment(DGIE) at the office of the Under-Secretaryof State for the Treasury. Investors are nowonly required to inform the competent au-thorities. However, the opening ofarepresen-tative office remains subject to DGIEapproval.

Following their inevitable decline on theback of the financial crisis in 2001, FDIinflows have picked up since 2003, risingsubstantially in 2005 to US$9.7 billion andeven more sharply in 2006 and 2007 to aboutUS$20 billion – an annual increase of 107per cent.


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WORLDTurkey

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OPPORTUNITY SCOPE



Mn USDMn USD


Germany ItalyUK USA France GermanyRussia China FranceItaly

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%

■ Fuels 21%■ Machinery 14%■ Road vehicles 8%■ Iron and steel 8%■ Plastics 4%■ Foodstuffs and agricultural raw materials 6%■ Chemicals 14%■ Other 26%

IMPORTS by products

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TurkmenistanPopulation (million inhabitants) 4.9GDP (US$ million) 10,496


RISK ASSESSMENTWith the hydrocarbon sector remaining theprimary economic engine in 2007 and 2008,the economy will grow by nearly 10 per centa year, though still limited by a lack ofinvestment in the sector.

A country with little debt and endowedwith extensive gas reserves, Turkmenistanhas real development potential but its isola-tion had been the main obstacle until thedeath in December 2006 of the former presi-dent Saparmourat Niazov. The new Head ofState Gurbanguly Berdymukhamedovseemsmore pragmatic than his predecessor. Byplaying off the rivalry between Russia, Chinaand the West, he has been able to impose adoubling of the price of gas sold to Gazpromand an increase in the capacity of the pipeline

linking his country to Russia. In August2007, the new president granted China therights to a gas field located in EasternTurkmenistan with the option of building agas pipeline that would be the first to linkwith a country other than Russia. Imple-menting those projects should nonethelesstake time.

Some real signs of liberalisation, like thereopening of theatres, cinemas and twoInternet-access centres, the shunting asideof hardliners from the preceding regime anda marked downplaying of the cult of person-ality would suggest that the president hasthe power to bring about change. The econ-omy remains nonetheless excessively cen-tralised with no apparent plans to liberaliseeconomic policy at this juncture.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 13 8 9 9 10 9Inflation (%) 3.1 9.0 10.4 7.2 6.0 6.0Public sector balance (%GDP) −1.3 0.4 0.8 5.1 0.4 0Exports 3.5 3.9 4.9 7.2 8.6 10.1Imports 2.6 3.1 2.9 2.6 4.1 5.0Trade balance 0.9 0.7 2.0 4.6 4.5 5.1Current account balance (%GDP) 2.7 0.6 5.1 15.3 11.7 11.7Foreign debt (%GDP) 13.3 9.0 5.4 3.3 2.0 1.3Debt service (%Exports) 10.9 9.0 6.1 3.4 2.3 1.6Foreign exchange reserves (in months of imports) 8.8 7.5 11.8 21.2 22.3 26.6


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UkrainePopulation (million inhabitants): 46.6GDP (US$ million): 106,111


STRENGTHS• The advance of the democratic process,

particularly the freedom of the media,constitutes the Orange Revolution’s mainachievement.

• Ukraine is strategically placed betweenRussia and the EU and benefits from theproceeds of transit duties on Russian gas.

• The resumption of growth since 2006attests to a certain disconnectionbetween the political and economicspheres.

• 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 metallurgicalproducts.

• In this context, the economy remainsvulnerable to the trend in steel pricesand to shocks resulting from Russia’scontrol over the supply of gas.

• The level of taxes, difficulties in ensuringapplication of the law, bureaucracy and,more generally, the lack of a politicalconsensus on reforms have underminedthe business climate.

RISK ASSESSMENTGDP growth remained strong in 2007, fuelledby dynamic consumption and investmentthat bolstered corporate solvency. Steel, con-sumer goods and building and public worksremained the strongest sectors. The latter,in particular, should continue to benefit fromthe infrastructure modernisation notablyundertaken in preparation for the Europeanfootball championships Ukraine will host in2012. Conversely, chemicals, textiles andelectronics have suffered from rising energycosts and foreign competition. Economic ac-tivity should slow moderately in 2008 amida possible price decline for metal – thecountry’s main export – and a further priceincrease for imported gas. The private sectorcould also feel the effects of the credit

tightening and stiffer conditions for borrow-ing abroad.

Stoked in 2007 by rising food prices andpre-election spending, inflation will barelyease in 2008 due to the price increases forimported energy. Concurrently, deteriora-tion of the terms of trade and continuedgrowth of imports should result in a furtherwidening of the external account deficit. Thiswill increase somewhat the risk of anexchange rate correction with the privatesector already carrying heavy debt denomi-nated in foreign currencies. At this juncture,however, FDI continues to cover the entiredeficit and has kept foreign exchange re-serves at good levels.

The political situation is still shaky. Afterthe early elections late September 2007, theformer allies of the ‘Orange Revolution’ re-

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formed a coalition in early December claim-ing a very slight majority and remainingriven by internal rivalries. Yulia Tymosh-enko, elected with difficulty by parliament,regained the role of prime minister. The issueconcerning the constitutional ambiguities on

the separation of powers remains very muchalive in the run-up to the next presidentialelection end 2009. Relations with Russia,meanwhile, could remain chaotic, especiallyregarding the supply of energy.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 9.6 12.1 2.7 7.1 7.2 6.3Inflation (%) 8.3 12.3 10.3 11.6 14.6 10.2Public sector balance (%GDP) −0.2 −3.2 −1.8 −0.7 −1.7 −1.1Exports 23.7 33.4 35.0 38.9 46.7 50.2Imports 23.2 29.7 36.2 44.1 54.3 60.6Trade balance 0.5 3.7 −1.1 −5.2 −7.6 −10.4Current account balance 2.9 6.9 2.5 −1.6 −4.1 −7.0Current account balance (%GDP) 5.8 10.6 2.9 −1.5 −2.9 −4.3Foreign debt (%GDP) 47.5 47.2 46.0 51.2 50.0 53.1Debt service (%Exports) 11.7 9.2 12.0 7.5 7.1 8.1Foreign exchange reserves (in months of imports) 2.8 3.0 5.0 4.7 4.8 4.8



■ Market overviewRobust economic growth in the first half of2007 built on the good performance achievedin 2006. The International Bank for Recon-struction and Development (IBRD) has in-creased its forecasts for 2007 from 5.5 to 6per cent. Domestic consumption, stimulatedby increased levels of income, is the principalgrowth driver, representing 60 per cent ofGDP. Industrial output remains strong (up11.8 per cent in the first six months of 2007from 6.2 per cent in 2006), boosted by themetals sector.

Inflation should reach 10 per cent in 2007,up from 9 per cent in 2006, due partly toprice increases in utilities, but mainly to therise in bread, sugar and potato prices in June2007. The dollar-pegged national currencyhas been stable since the beginning of theyear at UAH5.05 to the dollar.

■ Means of entryUkraine has been holding talks to join GATT,and subsequently the WTO, since 1993. It isone of the few large-sized countries, alongwith Russia, that is still not a WTO member.

Over this 15-year period, it has harmonisedits laws with WTO rules. It has adopted acustoms code and a property law, establisheda system for intellectual property protectionand made progress towards the harmonisa-tion and standardisation of healthandsafety,and phytosanitary rules, as well as adminis-trative practices.

Negotiations are almost concluded andaccession could take place within the nextfew months. The country, however, is facingopposition from both Krygyzstan and theEU.

The dispute with Kyrgyzstan officiallycentres on the write-off of Soviet-era debtbetween the two countries. In reality, thedispute is of a political nature, with Russiabacking the Kyrgyz veto so that it can delayUkraine’s accession until its own. The dis-pute with the EU relates to trade. EUmember states are unhappy with Ukraine’sexport tax on some products, includingscrap,which they see as an indirect subsidy to itsproducers. An agreement should be reachedin the coming weeks.

The EU wishes Ukraine to join the WTOquickly, as this would help lift remaining

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obstacles to trade with EU firms and rein inthe ‘raiders’ seeking, with the complicity ofUkranian magistrates, to despoil foreigncompanies of their investments. Moreover,so long as Ukraine is not in the WTO, talkson the free-trade section of a revampedneighbourhood agreement with the EU can-not begin.

■ Attitude towards foreign investorsWhereas FDI accounted for only 2–3 per centof GDP a few years ago, it represents 19 percent of GDP today. In many ways 2006 and2007 are the years that witnessed a shake-up in the old rankings. Growing investorawareness of Ukraine’s attractiveness, un-derpinned by the Orange Revolution and the

country’s situation on the threshold of Eu-rope, has sharply boosted inflows. In 2004,Ukraine was the 80th largest recipient ofFDI in the world; in 2007 it was 33rd.

The rankings of FDI-providers alsochanged in 2007, with many new countriesamong the top investors. France, for instance,is the eighth largest foreign investor (US$935million) today – compared with 2005 when itwas the 21st biggest (US$83 million) –mainly on the back of heavy investment inthe banking sector. Nevertheless, the busi-ness climate continues to be undermined byadministrative obstacles (late VAT refunds,tax and customs difficulties, etc) and ‘raiders’attempts to acquire control of both local andforeign-owned companies.

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OPPORTUNITY SCOPE



Mn USDMn USD


Turkey USA TurkmenistanGermany ChinaRussia Italy GermanyRussia Poland

EXPORTS by products IMPORTS by products■ Agricultural raw materials and foodstuffs 9%■ Fuels 30%■ Ores and metals 4%■ Chemicals 12%■ Machinery and transport equipment 26%■ Other 20%

■ Agricultural raw materials and foodstuffs 14%■ Fuels 10%■ Chemicals 9%■ Machinery and transport equipment 13%■ Non-precious metals 43%■ Other 11%

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United KingdomPopulation (million inhabitants): 60.8GDP (US$ million): 2,395,500


STRENGTHS• The presence of many financial

institutions has contributed to the City’sinfluence as Europe’s leading financialcentre.

• Strong growth potential, moderate taxes,procedural simplicity and access to theAnglo-Saxon world have attractedforeign capital.

• High value-added sectors likepharmaceuticals, biotechnology,electronics and aeronautics are wellpositioned in the international arena.

• Despite the increase in the workingpopulation fuelled by immigration,labour market flexibility and efficientemployment agencies have stemmed anyincrease in unemployment.

• Coverage of three-quarters of energyneeds by national hydrocarbonproduction has kept the trade deficitfrom widening further.

WEAKNESSES• The inadequacy of public services in

education, research and transport hasundermined productivity.

• Deterioration of public sector financeswill not facilitate eliminating theimbalances in public services.

• The surplus in the services andinvestment income balance has notnearly sufficed to offset the goods tradedeficit.

• Northern England, Wales and Scotlandhave been unable to bridge the gap withthe Greater London region.

• Differences in the level of activityprevailing in financial services, hightechnologies and property compared totraditional industries has complicatedmatters in adjusting economic policy.

RISK ASSESSMENTDespite a slowdown in the fourth quarter,economic growth remained strong in 2007.Households increased their spending encour-aged by strong job creationnotably inservices(3/4 of GDP) and construction. Public spend-ing remained dynamic with much ground tomake up as regards public health, educationand infrastructure, which has contributed toa continuing large public sector deficit.

The British economy will be markedly lessdynamic this year due mainly to sharpslowdown of both household consumptionand investment. Households will be facedwith 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 growthof disposable income, attributable to persist-ent inflationary pressures and substantialwage moderation in both the public andprivate sectors, will be more difficult to offsetthrough borrowing. Despite a reduction inthe Bank of England’s key rate, credit willbecome both more expensive and less avail-able with financial institutions, aware of thesharp increase in personal bankruptcies in2007, exercising greater caution. A decline inhousing prices would moreover hinder themortgage equity withdrawals that currently

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represent 6 per cent of disposable income. Inthis context, residential construction couldwell decline particularly for assets intendedfor rental purposes – where profitability hasdeteriorated substantially – as well as forthe high end affected by the reduction of thebonuses distributed in the financial sector ofthe City. Office construction will slow due tothe slowdown in services. Ongoing prep-arations for the 2012 Olympic Games alongwith the continuing dynamism of school,hospital and road and rail infrastructureconstruction will only partly offset that trend.Only the performance of goods exports, de-spite the flagging dynamism of the USmarket (15 per cent of sales) and the declineof the dollar, should improve, thanks to theweakening of the pound sterling against theeuro. That will not suffice, however, to reducea very large trade deficit only partly offset bythe recurrent surplus position of the servicesand investment income balance.

In 2007, the Coface payment incident indexremained satisfactory, bearing out the de-

cline in bankruptcies. Corporate profitabilityremained high with profits increasing 10 percent. They could level off in 2008, albeit at agood level, amid a decline in economic activ-ity. Although that will have little effect onlarge companies in view of their low-debtpositions and good cash flow, smaller com-panies with limited access to the financialmarket and that rely on adjustable-rate loansin consequence will experience difficulties tovarying degrees. The housing and homefurnishings (manufacturing and retailingsector) should suffer from the decline inresidential investment, even if that can bepartly offset by orders from the public sectoror related to preparations for the Olympics.Agricultural-product users and processors(breeders, cheese-makers, biscuit-makers,etc) will enjoy varying degrees of latitude topass on the rising cost of those products insales prices to their buyers. That may provedifficult when dealing with mass distributionwhere a context of sluggish consumption willexacerbate competition. Financial sectorsub-contracting will also present higher risk.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 2.7 3.3 1.9 2.8 3.1 2.0Consumption (var.) 2.9 3.4 1.4 2.1 3.1 1.9Investment (var.) -2.2 4.9 1.3 -4.0 6.0 2.0Inflation 1.4 1.3 2.0 2.3 2.3 2.2Unemployment 5.0 4.7 4.8 5.5 5.4 5.6Short-term interest rate 3.7 4.6 4.7 4.8 5.9 5.2Public sector balance (%GDP) -3.3 -3.3 -3.3 -2.7 -2.7 -3.1Public sector debt (%GDP) 42.0 40.4 42.1 43.0 44.0 45.0Exports (var.) 1.2 4.9 8.2 10.3 -4.1 4.1Imports (var.) 1.8 6.6 7.1 9.8 -3.0 3.0Current account balance (%GDP) -1.3 -1.6 -2.5 -3.2 -3.0 -3.0



■ DistributionIntense competition continued in the sectorin 2007, which nonetheless benefited fromthe growth of retail sales. Failures markedthe CD, DVD and video games retail sectorhowever (Music Zone, ChoicesUK). Super-market chains have become increasingly

competitive in the non-food segment, andsales via the Internet have been developing.The increasing cost of credit and energy willaffect growth in 2008.

■ Construction and public worksThe sector was subject to volatility in 2007.Housing prices were flat initially beforeeroding late in the year. Most large home

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builders have reported declining sales andnegative expectations for 2008. Rising inter-est rates and the liquidity crisis experiencedby Northern Rock shook up the market.Public housing construction, a governmentpriority, will guarantee a degree of activity.Outside the residential segment, activity willremain buoyant, thanks to work linked tothe 2012 Olympic Games and tostill-substan-tial spending on infrastructure, schools andhospitals.

■ AutomotiveSales have remained flat, which contributedto the manufacturer TVR’s failure early lastyear. The factories of US and Europeancarmakers have suffered from the Japanesecompetition. Ford’s plans to sell its Jaguarand Land Rover subsidiaries augur furtherrestructuring in the sector. Placed underChapter XI bankruptcy law in the UnitedStates, American first-tierpartsmanufactur-ers have successfully restructured several oftheir operations to the United Kingdom.Conversely, the margins of second- and third-tier parts manufacturers have suffered fromincreasing raw material costs and competi-tion from outside Europe. Those offeringbothinnovative products and technical expertisehave the chances for success.

■ ITTurnover has continued to grow, especiallyfor computers, up 20 per ent. Due to intensecompetition, however, margins have beenshrinking with several companies reportinglosses. The increased cost of credit and thestrength of the pound against the dollar havenot made things easier. No improvement islikely.

■ WoodThe sector experienced a revival in the pasttwo years, thanks especially to rising pricesfor soft wood. A shortage of basic soft woodhas, however, hampered manufacturers offences and sheds for the retail market. Thenews has been mixed for other processors.Furniture manufacturers have to signifi-cantly cut back on production this year withretailers turning their purchasing increas-ingly towards Eastern Europe. Economy and

raw material price trends will have a decisiveeffect on the sector outlook.

■ AgricultureIn 2007, as in 2006, the sector suffered frompoor weather conditions, outbreaks of footand mouth or blue-tongue diseases and theavian flu menace. The increases in staplecommodities prices, which virtually doubledfor wheat, barley, colza oil and dairy prod-ucts, were a pleasant surprise. Hopefully,activities that are intensive users of dairyproducts, oils, grain, etc, like breeders, meatprocessors, cheese-makers and biscuit-mak-ers for example, will be able to absorb thenpass on the higher prices to their clientele.


■ PaymentAlthough cheques are widely used as amethod of payment, they do not provide realsecurity as non-payment of cheques is not acriminal offence (cheques do not have to becovered when issued). The drawer of a chequemay stop payment at any time. Cheques canbe presented for cashing a second time underthe RDPR option (Refer to Drawer PleaseRepresent).

The bill of exchange, while rare in commer-cial transactions, is used in special cases. Ifa foreign bill remains unpaid at maturity, itmust be protested.

The open-account system, which makes itpossible to reduce costs, especially in case ofphased sales, can only work effectively afterthe co-contracting party establish mutualtrust and confidence. Centralized accountinghelps reduce costs and cashing times. Banktransfers are regularly used for domestic andinternational payments, especially via theSWIFT electronic network used extensivelyby major British banks for speedy and secureprocessing. Leading British companies alsouse two other highly automated inter-banktransfer systems – Bankers’ AutomatedClearing Services (BACS) and ClearingHouse Automated Payment Systems(CHAPS).

■ Debt collectionDebt collection agencies or solicitors handlethe recovery of overdue payments, which

UNITED KINGDOM

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1

begins with the service of formal noticereminding the debtor of his contractualobligations, increased by past-due interest.Under the ‘Late Payment of CommercialDebts (Interest) Act 1998’, small companiesare entitled – from 1 November 1998 – todemand default interest from large compa-nies, both public and private.

This law, introduced in successive stageswith the last stage coming into effect on 7August 2002, now permits all commercialcompanies to bill interest in cases of latepayment. Save as otherwise provided be-tween the parties, the applicable rate ofinterest is the Bank of England’s base rate(dealing rate) plus eight percentage points.

A creditor initiates the legal collectionprocess by lodging a ‘claim form’ with thecompetent legal authority, accompanied bythe supporting documents. Summary judge-ments, speedier rulings obtained during or-dinary proceedings, are more difficult toobtain by the claimant on claims contestedby the defendant.

The reform of the judicial process (or theLord Woolf reform), which saw the introduc-tion of new ‘Civil Procedure Rules’ with effectfrom 26 April 1999, is considered by lawyersto be a major breakthrough in dealing withdisputed claims.

The new rules of procedure have graduallycut litigation time, while parties can seekways of coming to a settlement either directlyor through mediation according to the alter-native method for settling disputes (ADR:

Alternative Dispute Resolution). Devices forspeeding up proceedings include the creationof three separate legal tracks – small claimstrack, fast track and multi-track – accordingto the claim amount at stake, the streamlin-ing of the supporting document-submissionand evidence-disclosure system and estab-lishment of a hearing schedule by the courtat the outset of proceedings.

Judgements are enforced either throughconventional methods (service of a writ ofexecution by bailiff, attachment of debtorassets with subsequent auction) or moredirectly for claims exceeding GBP750 for-mally serving a statutory demand for pay-ment by the creditor. Then, after expiry of a21-day period and in the absence of payment,transaction, or provision of a payment guar-antee, the creditor may file a winding-uppetition with the court. To elicit a speedierreaction or payment by debtors, the statutorydemand procedure may be used in some casesto collect uncontested claims directly withoutobtaining a prior ruling.


0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDUnited Kingdom

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150

UzbekistanPopulation (million inhabitants) 26.5GDP (US$ million): 17,178


STRENGTHS• Uzbekistan’s external financial situation

has benefited from the high prices of rawmaterials, mainly gold and natural gas.

• The country has run substantial tradesurpluses and maintained moderateexternal debt ratios.

• Central Asia’s most populous countryand located at the heart of the region,Uzbekistan has the potential to attractforeign investors.

WEAKNESSES• The economy is dependent on price

trends for raw materials.• A clientelistic power structure and

extensive corruption have engenderedpoor governance.

• The hardening of the regime since theMay 2005 riots could ultimately heightentensions in a context of social discontent.

• The discontent could foster the rise ofIslamic fundamentalism.

RISK ASSESSMENTThe 9.1 per cent growth achieved in 2007was the highest since independence in 1991.Although statistical data from Uzbekistanshould always be taken with a grain of salt,the very favourable external environmentlends credibility to this estimate.

The increase in value and volume of gasexports to Russia and the strong growth ofcar industry sales have been driving theeconomy with high gold prices and transfersfrom expatriates in Russia also making acontribution. Despite goodweather,however,cotton production in 2007 remained consid-erably below its pre-independence level. Itnow represents only 20 per cent of exportsagainst over 50 per cent in 1991. In a still

very favourable international environmentGDP growth should remain above 7 per centin 2008.

Uzbekistan’s political situation and busi-ness environment remain its main weak-nesses. The incumbent President IslamKarimov, in power since independence, wona sweeping re-election on 23 December 2007lacking opposition. His succession has re-mained completely uncertain, which consti-tutes a source of concern considering the highconcentration of power. The risk of newwaves of violence like the spring 2005 riotsin Andijan remains appreciable. Above all,continual interference by the state in trade,the internal affairs of companies and thebanking system constitute an obstacle to thecountry’s development.

UZBEKISTAN

151

1


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.2 7.7 7.0 7.2 9.1 7.2Inflation (%) 7.7 15.5 18.8 14.2 12 12Public sector balance (%GDP) 0.1 0.6 1.3 0.4 −0.6 −0.6Exports 3,240 4,263 4,757 5,690 6,580 7,230Imports 2,405 3,061 3,310 3,770 4,570 5,320Trade balance 835 1,202 1,447 1,920 2,010 1,910Current account balance 881 1,214 1,950 2,767 3,045 3,085Current account balance (%GDP) 8.7 10.2 14.4 17.2 16.2 15.4Foreign debt (%GDP) 42.0 36.2 30.4 24.5 20.6 18.2Debt service (%Exports) 19.2 15.7 12.4 10.0 8.4 6.9Foreign exchange reserves (in months ofimports)

6.2 6.4 8.2 11.7 13.2 14.9



■ Market overviewUzbekistan signed Article 8 of the IMFcharter on 15 October 2003, at the same timeas declaring its currency freely convertible.It has since made slow and steady changesto its trade legislation but has fallen short offull market liberalisation. The economy isstill largely managed by the governmentwith a view to achieving self-reliancethroughprotection of the domestic market and importsubstitution. Uzbekistan trades with 148countries across the world and has a tradesurplus with 48 of them. The volume ofordinary trade is rising steadily, especiallywith Russia, Turkey, Kazakhstan and evenIran. Among its main trading partners, onlySouth Korea and Germany export more toUzbekistan than they import from it.

To ensure timely debt servicing, the gov-ernment has limited the sovereign guaranteefacility to so-called ‘priority’ schemes definedsolely by the cabinet. It is possible to arrangemultilateral funding through internationallending institutions like the World Bank,EBRD and ADB, which are ready to assistwith projects that help open market accessand develop the private sector.

■ Means of entryMarket access is the focus of regulatory andlegislative reforms whose implementation isproving laborious. Imports of consumer and

capital goods continue to be restricted bymeasures (tariff and non-tariff barriers) toprotect the domestic market in line withgovernment policy. As the government hasbecome extremely cautious about the pace ofliberalisation and the size of the country’sdebt, access to the Uzbek market remainsdifficult, especially for small- and medium-sized firms, due to the high costs of marketpenetration. Large companies can, however,find business opportunities if they arrangeappropriate project finance.

The Uzbek Chamber of Commerce, set upin 2004, is actively involved in facilitatingrelations between Uzbek and foreign firms.Its task is that of limiting all too frequentstate intervention, but progress to date hasbeen very slow.

■ Attitude towards foreign investorsUzbek legislation offers investors safeguardsagainst discrimination, nationalisation orexpropriation and allows free repatriation ofprofits and capital. The only constraint oncapital transfers is the lack of availability offoreign exchange. Red tape remains one ofthe biggest obstacles, but legislation on thisissue is under review. The recommendedmeans of payment remains the irrevocableand confirmed letter of credit.

Uzbekistan has reached a phase in itsprivatisation programme where it needs FDIto kick-start economic growth. The latest

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152

privatisation programme for 2007–2011,which includes companies from strategicsectors, was published by presidential decreein July 2007. However, the majority of thesecompanies have either filed for insolvency orexist only on paper. The rule in takeovers isto get investors to renew the candidate’sproduction apparatus in exchange for certainbenefits. In strategic sectors, such as cottonand its derivatives, gold, energyandaeronau-tics, foreign shareholdings are subject to a49 per cent ceiling, with the Uzbek govern-ment retaining a majority stake.

■ Foreign exchange regulationsThe currency has been freely convertiblesince 15 October 2003. However, the govern-ment manages currency flows with a greatdeal of caution. The exchange rate seems tohave steadied and since 2006 is pegged tothe US dollar within a fluctuation band of ±2per cent. The main problem facing firms

doing business or making an investment isthe shortage of foreign exchange. Paymentsin hard currency are no longer restricted bythe currency’s lack of convertibility but bythe shortage of foreign exchange at custom-ers’ banks. The lack of immediate availabilityof hard currency and the slowness of thedecision-making process in large public-sec-tor companies or government departmentsmean that it can take up to six months toobtain foreign exchange. In light of suchdelays, there is a risk of revision of prices ofinternational contracts. Consequently, it isadvisable to take out exchange risk cover.

The sector of independent private banks isstill in the process of being restructured andis gradually opening up. The country’s twolargest commercial banks – National Bankof Uzbekistan (NBU) and Asaka Bank – arestate-owned and account for 75 per cent oftotal banking assets.

UZBEKISTAN

153

1

OPPORTUNITY SCOPE



Mn USDMn USD


Russia ChinaPoland Turkey Kazakhstan SouthKorea

Russia China GermanyKazakhstan

EXPORTS by products■ Gold 28%■ Cotton 22%■ Energy 13%■ Foodstuffs 13%■ Chemicals 6%■ Machinery and transport equipment 9%■ Other manufactured goods 10%

■ Machinery and equipment 48%■ Foodstuffs 8%■ Energetic products 3%■ Chemicals 12%■ Other 29%

IMPORTS by products

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200



Indicators Uzbekistan Regional average CISEmergingcountry average

GNP per capita (PPP dollars) 2,250 8,612 5,938GNP per capita (USD) 610 3,821 2,313Human Development Index 0.696 0.771 0.672Wealthiest 10% share of national income 30 28 31Urban population percentage 37 64 44Percentage under 15 years old 33 19 30Number of computers per 1,000 inhabitants n/a 72 50

2

TheAmericas

Outlook for 2008:The Americas 156

Argentina 163Bolivia 167Brazil 171Canada 175Chile 178Colombia 182Costa Rica 186Cuba 187Dominican Republic 191Ecuador 193El Salvador 197Guatemala 199Haiti 203Honduras 205Jamaica 207Mexico 208Nicaragua 212Panama 214Paraguay 216Peru 220United States 224Uruguay 228Venezuela 232

OUTLOOK FOR 2008

156

OUTLOOK FOR 2008

The AmericasPierre Paganelli and Christine Altuzarra

Country Risk and Economic Studies Department, Coface

NORTH AMERICA

■ An economic slowdown that will affectmany sectors


4.5%4.2% 4.4%

3.7%

0.8%

1.6%

2.5%

3.6%3.1% 2.9%

2.1% 1.7%

0%

1%

2%

3%

4%

5%

6%

7%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007(e)

2008(f)

0

50

100

150

200

250

300 (%)Economic growthPayment incident index

In the United States (rated A1), the growthslowdown in 2007 did not undermine corpo-rate solvency with companies continuing topost record profits. The deceleration will gainmomentum in 2008 albeit mitigated bysteady export performance. With householdsdeep in debt, their default rate will continueto rise amid a reverse wealth effectassociatedwith the decline of property values andtighter conditions surrounding mortgageloans. Exports, meanwhile, will benefit fromthe dollar depreciation and the demanddynamic in emerging regions. Corporateprofits should decelerate. Despite the verysatisfactory levels of debt and cash flowratios posted by companies, a credit crunchwill affect them. Although payment incidentswill increase in 2008, the deteriorationshould nonetheless remain moderate overall.

The incidents should be concentrated insectors sensitive to household consumptiontrends.

Scale of sectoral risk: North America

D

C+

C–

B–

A

C

A+

A–

B

B+

Highest risk

Lowest risk

IT industry / Building & public works

Car industry / Textiles-Clothing

Telecommunications (equipment manufacturers)

Air transport

Electronic components / Steel

Telecommunications (operators) / Paper / Mass distributionMechanical engineering/Pharmaceuticals / Chemicals

Coface has downgraded ornegativewatchl-isted the ratings of several sectors. This wasthe case for construction (rating downgradedagain in 2007, to B−), and activities thatdepend on it should suffer from the propertymarket downturn and the weakening of non-residential construction notwithstandingthegood performance in the public works seg-ment. Weaker consumption will affect massdistribution (A− rating negative watchlisted)with Wal-Mart continuing to underperformin 2007. The negative watchlisting of thechemical industry’s A− rating is attributableto the poor performance incarmanufacturingand the downturn in property construction.Sales in the paper industry (A− ratingremoved from positive watchlist) declined inthe 2007 first half.

Default probability has remained high inother sectors. The market share of Americancarmakers (rated C) will thus continue toshrink to the benefit of their Asian competi-

OUTLOOK FOR 2008

157

2

tion. Continuing moreover to contend withsevere financial difficulties, they will beweakened by the expected household con-sumption slowdown and the increasing costof inputs. The automotive industry crisis willcontinue to undermine the solvency of carparts manufacturers (also rated C). Textiles-clothing (rated C) will suffer from the increas-ing preference of households for importedgoods. The level of risk in air transport (ratedC+), after easing early 2007 with airlinesemerging from red ink, increased amid risingfuel costs.

Default probability in pharmaceuticals(rated A−) has conversely remained lowdespite the negative impact on growth of thecompetition from generics and the expiry ofmany patents. The computer industry (ratedB−), electronic components (rated A), alongwith telecommunication equipment manu-facturers and operators (rated, respectively,B+ and A−) will continue to benefit fromstrong household demand despite the ex-pected slowdown. Demand from emergingcountries and high prices for metals willbenefit steel (rated A).

LATIN AMERICA

■ An economic slowdown shadowing theweaker growth in the United States,with the contribution of domesticdemand remaining crucial

GDP Growth should remain lower than the emerging countryaverage (%)

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008Latin America Emerging Countries

In Latin America, GDP growth should slowmoderately in 2008, up about 4.2 per centafter up 4.8 per cent in 2007, in an interna-tional environment marked by the economicslowdown in the United States. This overall

growth achieved by regional countries thuscontinues to lag far behind the near 7.0 percent average growth registered for all emerg-ing countries. Latin America has nonethelesswithstood the repercussions of the interna-tional financial turbulence relatively well,and domestic demand will generally continueto drive the economy.

Household consumption should generatetwo-thirds of GDP growth underpinned, al-beit to a lesser extent than in 2007, byincreases in public spending and the expan-sion of credit in most large economies as wellas by the continued high inflow of expatriateremittances especially in Mexico, CentralAmerica and the Caribbean area. Investmentshould continue to make a significant contri-bution, particularly in Brazil and Mexico.Despite continuing large needs in Asia,however, world demand for raw materialscould weaken slightly and affect the expan-sion of a continent still heavily dependent oncommodity exports.

Economic growth trend for main countries in Latin America (% of GDP)

-1 2 3 4 5 6 7 8 9

10

Peru

Argen

tina

Colom

bia

Venez

uelaChil

e

Brazil

Mex

ico

Ecuad

or

2007 (e) 2008 (f)

The main Latin American economies fallinto three disparate groups. Economicexpan-sion will remain relatively strong in Peru (up7.0 per cent) spurred by relatively robustdomestic and external demand, Argentina(up 6 per cent) with domestic demand stim-ulated by still relatively accommodatingeconomic policy and in Venezuela (up 5.5 percent) despite a slowdown attributable to flatoil production. Growth will be not quite asstrong in Chile (4.6 per cent) driven mainlyby consumption and public investment orBrazil (4.6 per cent) with public and privateinvestment playing a preponderant role.

GDP growth will be weaker, however, inMexico (up 2.9 per cent) due to the NorthAmerican economic slowdown and in Ecua-dor (up 2.6 per cent) amid the weaker growthof private consumption and a decline incorporate investment.

OUTLOOK FOR 2008

158

Many obstacles have kept the region fromachieving Asian-style growth rates: moreunequal income distribution than in regionswith comparable development, poor qualityeducation, and excessive informal employ-ment, a public sector debt burden impedingspending on modernisation, and a deficientinstitutional framework and business envi-ronment. These structural weaknesses no-tably reflect the insufficient contribution ofinvestment to GDP (about 20 per cent for theregion), too small in itself and in comparisonto a contribution inall otheremergingregionsof about 28 per cent).

■ Shrinkage of current account surplusesthat thus far has not preventedimprovement in the external financialsituation

Contraction of the current account surplus (% of GDP)

-4%

-2%

0%

2%

4%

6%

2001 2002 2003 2004 2005 2006 2007 2008Latin America Emerging Countries

After generating current account surplusesfor five straight years, Latin America shouldsee it decline sharply this year and its currentaccount remain just in balance with thegrowth of imports (11.5 per cent) likely to benearly twice that of exports (6.0 per cent) inthe main Latin American countries. Thesmall improvement in the terms of tradewith immigrant transfers levelling off, duenotably to the North American slowdown,will not suffice to offset this gap.

The increase in exports should thus bevery moderate in the major ore-producingcountries like Chile (copper) or Peru (or,copper, zinc). The main oil-producing coun-tries 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, havebeen less vulnerable on this score. Tradi-tional industrial sectors, like textiles orclothing, are still experiencing difficultiesmeeting Asian competition. This has alsobeen the case for certain Central Americanexport subcontracting industries.

The succession of current account sur-pluses from 2003 to 2007 made it possible tobuild up foreign exchange reserves, whichreached a record US$400 billion end 2007but should only grow moderately this yearup to about US$450 billion. These reserveswill nonetheless constitute an appreciablesafety net in case of an exogenous shock.

In this context, the foreign debt reductionprocess has taken root in most Latin Ameri-can countries, with more difficult financingconditions expected in international marketsthis year. FDI should in any case constitutethe main source of external financing. At theoverall regional level, the percentage ratio ofaverage foreign debt to GDP should come toabout 23 per cent in 2008, a figure below theoverall 27 per cent average for emergingcountries. The ratio for Brazil will be about16 per cent and for Mexico 18 per cent.Among the major regional countries, onlyArgentina’s debt-to-GDP ratio will remainhigh (44 per cent), not withstandingamarkedreduction of foreign debt in the wake of therestructuring undertaken in June 2005.

■ The increased need for fine tuning ofmonetary and fiscal policy …

The resurgence of inflationary pressures hasincreased the need for suitable interventionsby monetary authorities, whose effectivepolicies facilitated keeping inflation undercontrol in 2007. Price rises are attributableat once to the increase in world prices for rawmaterials and food products and the high-production capacity utilisation rate prevail-ing in the region. Government officials will,however, have to make a difficult choicebetween attempting to counter either theupsurge of inflation or an excessive slowdownof GDP growth. Although inflation shouldremain limited by historic Latin Americanstandards, the rate should nonetheless av-erage about 6.0 per cent in 2008 against 5.4per cent last year. There are, however, two

OUTLOOK FOR 2008

159

2

exceptional cases worth noting: in Argentinawhere despite price controls inflation shouldreach 13 per cent reflecting economic over-heating and bottlenecks, and in Venezuelawhere the expected inflationary upsurge ofnearly 20 per cent, again despite pricecontrols, is attributable to expansionary eco-nomic policies coupled with insufficient pro-duction capacity.

Continuation of tight fiscal policies willmake it possible to stabilise the averageregional fiscal deficit at slightly below 1 percent of GDP in 2008 despite less buoyantinternational economic conditions and theresulting slower growth of fiscal revenues. Afew countries will even continue to runsurpluses. Chile should thus run a surplusrepresenting about 3 per cent of GDP under-pinned by strict policy. The continuing sur-plus enjoyed by Argentina (near 1 per cent)will reflect continued high GDP growth andlevies on exports of staple commodities. InMexico, partial tax-system reform shouldfacilitate reducing the fiscal deficit to a levelrepresenting a negative 1 per cent GDP.Although Brazil’s fiscal deficit should alsoease (down 1.8 per cent of GDP) this resultwill mainly be attributable to excessivelyhigh taxes and not to better management ofpublic spending. Despite its oil wealth, Ven-ezuela should show a fiscal deficit of nearly 1per cent of GDP attributable to a degree offiscal laxity.

■ … and, despite a decline in public debtratios, a need for further publicfinancial reform

Still high GDP/public debt ratios, notably in Argentina and Brazil, with Chile being the exception. ( %)

2007 (e) 2008 (f)

-

10

20

30

40

50

60

70

Emer

ging

countri

es

Latin

Am

erica

Argen

tina

Brazil

Colom

bia

Ecuad

or

Mex

icoPer

u

Venez

uelaChil

e

The average public debt ratio in Latin Amer-ica should continue to decline to a level repre-senting 50 per cent of GDP while the overall

emerging-country ratio will come to 41 percent of GDP. With the notable exception ofChile, Latin American countries will thus re-main handicapped by their public sector debtburden. In Brazil, a gross ratio of 64 per centofGDP is expected in 2008; although public debtremains vulnerable to domestic interest ratetrends with its average maturity too short, theproportion denominated in foreign currencieshas been replaced by bonds denominated inthe local currency. In Argentina, despite a de-cline, the public debt level will still be high at56 per cent of GDP with the improvement inpublic sector finances attributablemoretorel-atively favourable economic conditions thanstructural adjustments.

In general, however, the current trend inLatin America has been towards improve-ment in the structure of public sector debt.Via more active management, most countrieshave been reducing the proportion of short-term, variable rate and foreign currency-denominated debt and putting greateremphasis on domestic sources of financing, aprocess facilitated by improvement in mac-roeconomic fundamentals. As a result, thelarge countries in the region will be unlikelyto experience major financing difficulties in2008, despite the risk of a liquidity shortageexisting at the world level.

Nonetheless, to establish greater macro-economic stability and reduce poverty rateconstituting a source of political and socialtensions additional public sector financialreforms will be necessary, particularly, wid-ening the tax revenue base notably by reduc-ing the informal economy’s size, increasingthe flexibility of public spending that com-prises a high proportion of mandatory andpre-allocated spending and developing con-ditional-assistance social programmes likeChile’s Solidario, Brazil’s Bolsa Familia andMexico’s Oportunidades.

■ Consolidated democratic systems in abusiness environment with room forimprovement

Latin America’s democratic systems havegrown stronger in recent years. There hasbeen notable progress, particularly with theholding of free elections and the decline ofthe political role played by the army. But

OUTLOOK FOR 2008

160

there are still problems notably due toinstitutional deficiencies and especially, de-spite the progress made, a still-high povertyrate afflicting 38 per cent of the populationin 2006, and a greater degree of inequalitythan in regions with comparable develop-ment. Those social factors and greater trans-parency were responsible for the victories ofleft-wing candidates in several countries,except Colombia and Mexico, in the manypresidential elections held in 2006 and 2007.This political trend has nonetheless takenvery different forms ranging from pragmaticand moderate in several cases – Brazil, Chile,

Peru and Uruguay – especially with thenewly elected presidents having to come toterms with coalition government, to radicalin others (Bolivia, Ecuador and Venezuela)while the situation in Argentina seems to liebetween the two extremes. The electoraloutcome in certain Andean countries, mean-while – Bolivia, Ecuador and Peru – un-leashed an upsurge of demands relating tonative Indian identity, control of naturalresources and the sharing of wealth thatcould spur tensions and have a deterrenteffect on investment, particularly fromabroad.

Business climate ratings: Latin America

Canad

a

United

Sta

tes

Chile

Costa

Rica

Brazil

Mex

ico

Panam

a

Urugu

ay

Argen

tina

Colom

biaPer

u

Domini

can

Rep.

Bolivia

Ecuad

or

Guate

mala

Nicara

gua

Parag

uay

Venez

uela

Cuba

Haiti

A1

D

C

B

A4

A3

A2

There moreover continues tobesubstantialroom for improvement as regards the busi-ness environment, a weakness epitomised bythe poor ratings of almost all Latin Americancountries on that score with the notableexception of Chile (rated A2) and, to a lesserextent, of Costa Rica (rated A3). Rated A4,Brazil’s strengths include the ready availa-bility of business information, regulatoryquality acceptable to business and a satisfac-tory legal environment for collection pur-poses, but deficient infrastructure remainsits main weakness. In Mexico (rated A4), thebusiness environment needs improvementwith political and social obstacles delayingprogress on reforms concerning infrastruc-ture (energy, telecommunications), educa-

tion, labour law and the judicial system whilecollection procedure are, moreover, not en-tirely satisfactory. In Argentina (rated B),although the business environment has beenshaky with the legal and regulatory frame-work not sufficiently stable, the businessinformation situation is acceptable as arecreditor protection and collection procedures.As regards these last points, the same holdstrue for Peru (rated B) where the businessenvironment is undermined by the limitedeffectiveness of public officials, corruptionand deficient infrastructure. In Venezuela(rated C), the business environment ismarked by relative unpredictability, govern-ment interventionism and extensive corrup-tion undermining confidence in business

OUTLOOK FOR 2008

161

2

circles with collection procedures are moreo-ver not very satisfactory.

■ Corporate financial health andpayment behaviour should remaingenerally satisfactory


5.4%

2.3%

0.2%

4.0%

0.2%0.5%

2.0%

6.0%

4.5%

5.4%

4.9%

4.2%

0%

1%

2%

3%

4%

5%

6%

7%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007(e)

2008(f)

0

50

100

150

200

250

300

Economic growth

Payment incidents index

In a less favourable context and despite moremoderate regional growth, the financialhealth of Latin American companies shouldgenerally remain satisfactory. The financialsolidity of major companies has improved inrecent years with profits rising and financingproblems easing. Smaller companies will,however, be more vulnerable in case of acredit crunch. Payment experience shouldthus remain generally satisfactory even ifcertain sectors will continue to be faced withparticular difficulties, like textiles under-mined by Asian competition or agriculturestill vulnerable to weather conditions.

In Chile, the mining and paper indus-tries, construction, food, retail and financialservices have been the most dynamic sec-tors with the Coface payment experienceon companies remaining generally very sat-isfactory. In Mexico, payment experiencehas remained satisfactory with the mostdynamic sectors including construction, re-tailing and, to a lesser degree, the auto-motive industry. The difficultiesexperienced in the dairy industry or tex-tiles are the result of particular problemsor a lack of competitiveness. In Brazil,payment experience has been satisfactoryin growth sectors, oleaginous production,the sugar industry, mineral extraction, con-struction, steel, aviation and, to a lesserextent, the automotive industry. Certainsectors may, however, be faced with par-

ticular difficulties like pharmaceuticalproduct distribution, and fertilisers, or withforeign competition, like the clothing andshoe industries, which has affected theirpayment behaviour. In Colombia, compa-nies tend meet their payment obligationson time. Construction will remain the mostdynamic sector followed by retailing, oiland mineral extraction, telecommunica-tions and services. In Argentina, the fi-nancial health of private companiescontinues to improve, particularly in theautomotive industry, construction, com-munications, tourism and agriculture. Theweakest sectors include food due to pricecontrols and export restrictions, oil refiningdue to a lack of investment and publicservices (water, electricity, gas, transport)due to regulated prices. In general, pay-ment experience on private companies hasbeen relatively satisfactory. In Venezuela,certain sectors should suffer from morerestrictive import policy (automotive in-dustry, alcohol, tobacco, maintenance serv-ices and technical assistance), and therehave been recurrent payment delays re-sulting from bureaucratic slowness linkedto the foreign exchange mechanism man-aged by the CADIVI Exchange Adminis-tration Board.

■ @rating trendsThe average level of risk has declinedslightly in the region but significant dif-ferences have persisted between countries.Chile’s A2 rating remains unchanged withthe country benefiting from tight macro-economic management, remarkable politicalstability and a quality business environ-ment. Mexico is still rated A3 based ongood economic and financial fundamentalsin conjunction with satisfactory paymentexperience. Brazil has kept its A4 ratingswith its economic and financial stabilityand its enhanced capacity to cope with thevolatility of international financial marketsconstituting an improved business environ-ment. Colombia continues to be rated A4reflecting the continuation of orthodox ec-onomic policy and satisfactory corporatepayment behaviour notwithstanding the in-security problems. Coface has upgraded

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Costa Rica’s B rating to A4 based on abrighter economic and financial outlook inthe wake of the approval late 2007 of thefree trade agreement between CentralAmerica and the United States. Costa Ricamoreover benefits from stable political in-stitutions and a satisfactory business en-vironment. Peru continues to be rated Bwith the continuing improvement in itseconomic and financial situation not suf-ficing to offset its vulnerability to exogenous

shocks and the business environment re-maining difficult. Argentina has kept its Crating with improved conditions and abrighter economic outlook clouded by in-terventionist economic policy and an un-certain business environment. Venezuelahas also kept its C rating due to the ques-tionable use of its oil wealth, a lack ofeconomic diversification and an unpredict-able framework for doing business.

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ArgentinaPopulation (million inhabitants): 39.1GDP (US$ million): 214,058

Country @rating: CMedium-term rating: Very high riskBusiness climate rating: B

STRENGTHS• Endowed with abundant natural, energy,

mineral and agricultural resources,Argentina has benefited from the strongworld demand and high prices for rawmaterials.

• The undervalued local currency hasbenefited domestic production and exportcompetitiveness.

• The country’s education level and humandevelopment indicators have beensubstantially above the Latin Americanaverage.

• The work force is skilled and adaptable.

WEAKNESSES• The economy continues to be partially

dependent on raw materials and to sufferfrom insufficient investment particularlyin the energy sector and infrastructure.

• Despite the restructuring of its bond debton favourable terms in June 2005 andearly IMF repayment in January 2006,foreign debt is still high.

• Sustained improvement in publicfinances will depend on implementationof genuinely tight fiscal policy.

• Good performance by the economy willrequire an improved businessenvironment and a steadier legalframework.

• Social tensions and inequality havepersisted.

RISK ASSESSMENTThe repercussions of the 2007 internationalfinancial turmoil on the real economy shouldremain limited. Growth will be more moder-ate in 2008 although still driven by domesticdemand spurred by still relatively accommo-dating economic policy. Still benefiting fromstrong world demand for commodities andfrom an undervalued peso, exports shouldallow Argentina to run a current accountsurplus again and substantially increaseforeign exchange reserves.

With foreign debt declining after its partialcancellation in 2005 and early IMF repay-ment in 2006, the relevant ratios shouldcontinue to improve. Argentina will, how-ever, have to normalise its relations withforeign creditors, which could happen in thewake of Cristina Kirchner’s election as pres-

ident in October 2007. Although a fiscalsurplus is also expected in 2008, lastingimprovement in public finances will dependon adoption of truly tight fiscal policy thatthe new administration could decide to im-plement gradually.

The disquieting increase in inflation de-spite price controls and index adjustmentsreflects economic overheating and bottle-necks. Argentina has particularly sufferedfrom a lack of investment, especially in theenergy and transport sectors, undermined bya shaky business environment and interven-tionist economic policy.

That context notwithstanding, the finan-cial health of private companies has contin-ued to improve, particularly in the carindustry, construction, communications andtourism, as well as in an agricultural sector

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buoyed by a record harvest. The shakiestsectors include food, due to price control andexport restrictions, oil refining, due to insuf-ficient investment, utilities (water, electric-ity, gas, transportation) because of regulated

prices and tobacco, which is suffering from adrop in demand. In total, the Coface paymentexperience on private companies has beenrelatively satisfactory.


(USD billions or %) 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 8.8 9.0 9.2 8.5 8.0 6.0Inflation (period-end rate) 3.7 6.1 12.3 9.8 16.0 13.0Public sector balance (%GDP) 1.1 3.7 2.4 1.8 1.2 0.9Exports 29.9 34.6 40.4 46.5 52.0 54.9Imports 13.1 21.3 27.3 32.6 39.1 42.9Trade balance 16.8 13.3 13.1 13.9 12.9 12.0Current account balance 8.2 3.4 6.0 8.1 7.3 5.3Current account balance (%GDP) 6.3 2.2 3.2 3.7 2.7 1.7Foreign debt (%GDP) 127.2 111.8 72.5 59.1 50.2 43.7Debt service (%Exports) 73.9 52.6 28.6 21.7 20.1 19.7Foreign exchange reserves (in months ofimports)

5.7 5.9 7.5 7.5 9.3 10.1



■ Means of entryArgentina is a member of Mercosur, whosefounding treaty enshrines the principle offree movement of goods within the area.Mercosur comprises its four founding mem-bers: Brazil, Argentina, Uruguay and Para-guay. Venezuela was included in November2005, but its membership has not yet beenratified by all the parliaments (Brazil andParaguay have still to decide). The commonexternal tariff ranges from 0 to 35 per cent(average 13 per cent).

Intra-Mercosur trade is duty-exempt for90 per cent of the products on the unweightedlist. The general treaty provides for sizeablespecial regimes (cars, IT, telecommunica-tions, sensitive products) and exceptionalregimes (Manaus and Tierra del Fuego spe-cial customs areas).

Imports are liable to 21 per cent standardrate VAT (CIF + customs duties), which canvary according to the product and service, a0.5 per cent statistical tax, as well as ad hocindirect 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 (im-port licences). Since 2002, exports are liableto taxes ranging from 5 to 25 per cent – oil andgas have higher rates – and constitute ahighly lucrative source of tax revenue (2.3percent of GDP in 2004 and 2005).

■ Attitude towards foreign investorsDecree 1853/93 defines the framework for for-eign investment and enshrines the principleof equal treatment of domestic and foreign in-vestors as well as free repatriation of capitaland profits. Foreigners may invest – on thesame terms as local investors – in virtuallyevery branch of the economy without seekingprior approval. However, the legal system isunstable and the state of economic emer-gency, in force since 2002, has been renewed.

The most vulnerable companies are publicservice contractors and providers (33 inter-national firms are seeking arbitration at theWorld Bank, despite a stay of proceedings foraround 10 of them). However, firms that arebased in the country and know its strengthsand weaknesses are prospering from theboom. Real opportunities exist in Argentina,especially in mining and agri-foods andrelated downstream activities.

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OPPORTUNITY SCOPE



Mn USDMn USD


Brazil USAChile China Spain USABrazil China FranceGermany

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%

■ Intermediate goods 37%■ Capital goods 26%■ Consumer goods 12%■ Fuels 5%■ Other 20%

IMPORTS by products


010002000300040005000600070008000

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country average


BOLIVIA

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BoliviaPopulation (million inhabitants): 9.3GDP (US$ million): 11,163


STRENGTHS• Bolivia is endowed with abundant

hydrocarbon resources, notably thecontinent’s largest gas reserves afterVenezuela’s, and substantial mineral andagricultural wealth.

• The country belongs to the ACN, itsassociation with Mercosur has facilitatedexports to two large neighbouringcountries, Brazil and Argentina, and ithas sought to normalise relations withanother neighbour, Chile.

• Bolivia benefited from concessionaltreatment of its foreign debt granted bypublic creditors and relief extended bymultilateral financial institutions, underthe HIPC and MDRI programmes.

WEAKNESSES• Bolivia has suffered from its landlocked

position, ethnic and regional cleavagesand social indicators among the lowest inLatin America.

• Exports rest on a limited number ofcommodities (natural gas, oil, zinc, silver,soybeans), with coca cultivationremaining a major problem.

• The banking sector’s extensivedollarisation continues to be a source ofweakness.

• The political, social and businessclimates have been very poor.

• Implementation of President Morales’radical programme will be unlikely toease either the tensions in the country orthe risks of separatism in the easternplains of Santa Cruz, Tarija, Beni andPando, rich in gas reserves andagricultural resources.

RISK ASSESSMENTAfter an economic slowdown in 2007 attrib-utable to bad weather conditions for farmproduction and bottlenecks in the hydrocar-bon and mining sectors, the economy shouldonly manage weak growth in 2008. Domesticdemand will be the main economic engine,underpinned by household consumption, aninvestment recovery and expansionary fiscalpolicy. The strong inflation of 2007, stokedby the disruptive effects of the floods and byhigh world grain prices, should ease onlyslightly this year.

After the gas sector nationalisation late2006, the government is now planning to na-tionalise the mines and telecommunications.

Without foreign assistance, however, Boliviacould experience difficulties with manage-ment. In the export market, strong demandfrom its main trading partner Brazil will off-set the United States slowdown. Imports willgrow, meanwhile, with increased publicspending on infrastructure and the revival ofprivate investment in hydrocarbons and min-ing spurring capital goods purchases abroad.Although running very large external ac-count surpluses and thus building up largeforeign exchange reserves, Bolivia has re-mained financially weak even after cancella-tion of part of its foreign debt. Relations withinternational financial institutions havebeen strained, affected by the policy options

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taken by the government. Further extensionbeyond February 2008 of the preferentialaccess of Bolivian products to the USmarket under the Andean Trade Promotionand Drug Eradication Act will depend oncompromises on coca cultivation and invest-ment protection.

At the initiative of the indigenist PresidentEvo Morales, the Constituent Assembly

adopted, end 2007, a new constitution thatnotably stipulates autonomy for the Indiansand the possibility of a second presidentialterm. The constitutional charter is subject toapproval by referendum in 2008, but in theabsence of a consensus, the political andsocial unrest could intensify. In this context,there remains a risk of scission by easternprovinces led by the opposition.


USD billions or % 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.8 3.9 4.1 4.6 3.8 4.0Inflation (period end rate) 3.3 4.6 4.8 4.9 11.0 9.0Public sector balance (%GDP) -7.9 -5.6 –2.3 4.6 1.0 1.0Exports 1.6 2.1 2.8 3.9 4.4 4.9Imports 1.6 1.8 2.3 2.7 3.3 3.6Trade balance 0.0 0.3 0.5 1.2 1.1 1.3Current account balance 0.1 0.3 0.6 1.4 1.5 1.5Current account balance (%GDP) 1.0 3.8 6.5 12.3 11.8 10.8Foreign debt (%GDP) 70.0 69.2 65.9 41.3 37.3 34.3Debt service (%Exports) 15.5 14.9 12.7 9.0 7.6 6.8Foreign exchange reserves (in months of imports) 4.8 5.0 5.8 9.5 11.0 12.5


CONDITIONS OF ACCESS TO THE MARKET■ Market overviewA small landlocked state surrounded bypowerful neighbours, Bolivia attached greatimportance in the 1990s to an open borderpolicy and trade integration with the othercountries of the region. It applies de facto 10per cent flat-rate ad valorem customs dutyon all imports from non-ACN countries,excluding some capital goods which are liableto a reduced rate of duty. Foreign directinvestment has fallen since 2000, due partlyto the completion of the investment pro-gramme involving capitalised companies butmostly to the resurgence of social conflict andthe economic policy pursued since December2005. Unskilled Bolivian labour is plentifuland cheap. Wages can be fairly high forpositions of responsibility. Employment offoreign staff is, in principle, limited to 15 percent of a company’s workforce.■ Means of entryFarm, crop and animal products requirehealth certificates which comply with the

standards laid down by the ACN and agreedby Bolivia. The National agency, Senasag, isresponsible for administering all import-related health standards. All imports aresubject to random checks by Bolivian cus-toms. However, the growth in parallel mar-kets is causing concern among legal traders.Documentary credit is the most widely usedmeans of payment for both cash and deferredsettlements. Delivery against payment isalso used, but is far less widespread. Wherebusiness relations are well established, pay-ments are usually made by bank transfer.Defaults by local companies are fairly fre-quent. Against this background, it is highlyadvisable to use irrevocable and confirmeddocumentary credit if there is any doubtwhatsoever about the buyer’s creditworthi-ness.

■ Attitude towards foreign investorsWhile foreign investment has been grantedthe same terms as investment by Boliviannationals, in actual fact there has been anincrease in the number of complaints against

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local businesses. The election in late 2005 ofPresident Evo Morales has been followed bythe oil and gas nationalisation decree of 1May 2006 and the announcement of agrarianreform and land redistribution. These eventshave served as a deterrent to foreign invest-ment. The national development plan 2006–2010 aims to pull back from the neoliberalpolicies followed for some 20 years and torestore the State as the motor of economicactivity, especially in strategic sectors suchas 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. Ithas also signalled its intention, not followedby action for the time being, to re-negotiatethe bilateral investment promotion and pro-tection agreements concluded with severalcountries, including France.

■ Foreign exchange regulationsBolivia is a highly dollarised country, withover 70 per cent of bank deposits denomi-nated in dollars at end 2006. There are norestrictions on the purchase, sale and trans-fer of foreign exchange.

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OPPORTUNITY SCOPE



Mn USDMn USD


Brazil ArgentinaUSA Colombia Japan ArgentinaBrazil Chile PeruUSA

EXPORTS by products■ Natural gas 45%■ Petroleum 9%■ Zinc 15%■ Other ores 9%■ Foodstuffs 9% ■ Soya 5%■ Other 9%

■ Chemicals 19%■ Machinery and electrical equipment 22%■ Vehicles 11%■ Foodstuffs 10%■ Fuels 10%■ Plastics 6%■ Other 22%

IMPORTS by products

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country average


BRAZIL

171

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BrazilPopulation (million inhabitants): 188.7GDP (US$ million): 1,067,962


STRENGTHS• Brazil boasts abundant and varied

natural resources and a relativelydiversified economy.

• Manufactured products constitute agrowing proportion of production andexports.

• The country has increased its economicand financial stability and its capacity towithstand international financial marketvolatility.

• The policy of preserving fundamentalmacroeconomic equilibrium should stayon track.

• Brazil’s domestic market potential andfavourable labour costs have tended toenhance its attractiveness to foreigninvestors.

WEAKNESSES• Public debt has remained high and

exposed to domestic interest rate trends,with its maturity being still too short.

• The structural reforms needed ineducation, social security, job market andtax and regulatory systems have comeagainst substantial political roadblocksand lack of official commitment.

• A lack of investment has resulted indeficiencies in energy, rail, road and portinfrastructure, with public/privatepartnerships not yet really effective.

• Brazil is still relatively vulnerable to adownturn in raw material prices.

RISK ASSESSMENTWith domestic demand remaining the eco-nomic engine, growth should remain strongin 2008 and almost reach the 5-per centtarget set out in the government’s January2007 growth acceleration programme. Al-though Brazil has demonstrated notablecapacity to withstand international financialmarket volatility, the emergence of inflation-ary pressures has prompted the CentralBank to put further reductions of still-highinterest rates on hold.

Export performance, the appreciation ofthe real notwithstanding, should allow thecountry to maintain trade and current ac-count surpluses and cause a sharp reductionin external financing needs, entirely coveredby foreign direct investment. Moreover, Bra-

zil’s external vulnerability should continueto decline sharply in conjunction with amarked improvement in external debt ratios,with the country’s record level of foreignexchange reserves constituting a very solidsafety net.

Although the structure of public domesticdebt has continued to improve, total publicdebt is still too high at 64 per cent of GDP ingross terms and 45 per cent in net in 2007.This has notably tended to delay infrastruc-ture modernisation. Progress on the struc-tural reforms needed meanwhile to fostermore sustainable growth is likely to remainslow due to the parliamentary coalition’s lackof homogeneity and to a lack of politicalcommitment. The reforms will nonetheless

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be a major challenge during President Lulada Silva’s second term.

In this relatively favourable context, cor-porate solvency has been generally improv-ing, particularly in buoyant sectors likeoleaginous production, the sugar industry,mineral extraction, construction, steel, aero-nautics and, to a lesser degree, the carindustry. The Coface payment experience

has been satisfactory. Certain sectors, how-ever, like pharmaceutical product and fertil-izer distribution, may have to contend withparticular difficulties while others, like cloth-ing and shoes, have been facing foreigncompetition heightened by the real’s strengthwith their payment behaviour suffering inconsequence.



Economic growth (%) 1.2 5.7 2.9 3.7 5.2 4.6Inflation (period-end rate) 10.4 7.6 5.7 3.1 4.2 4.1Public sector balance (%GDP) -4.6 -2.4 -3.0 -3.0 -2.3 -1.8Exports 73.1 96.5 118.3 137.5 155.1 165.5Imports 48.3 62.8 73.6 91.4 112.4 129.6Trade balance 24.8 33.6 44.7 46.1 42.6 35.9Current account balance 4.2 11.7 14.0 13.3 11.5 4.3Current account balance (%GDP) 0.8 1.8 1.6 1.2 0.9 0.3Foreign debt (%GDP) 42.7 33.2 21.3 18.7 16.3 15.8Debt service (%Exports) 68.1 48.2 39.5 30.8 20.5 20.0Foreign exchange reserves(in months of imports)

6.9 6.1 5.1 6.7 12.4 13.0



■ Market overviewThe current minimum monthly wage is BRL380 (about €150). Employer social securityand compulsory benefit contributionsamount to about 50 per cent of the grosswage. Pension and tax reforms could resultin reduced contributions for export sectorsprincipally.

■ Means of entryThe average rate of customs duty is approxi-mately 10.7 per cent and the top rate 35 percent. The country is bound by Mercosur’sCommon External Tariff, which is subject tonumerous exceptions. Brazil maintains anumber of non-tariff barriers to imports,including import licences, customs valua-tions and inspections and prior productregistration. The most widely used means ofpayment are down payments, pre-payments,cash against documents, acceptance bills andirrevocable letters of credit confirmed by a

Brazilian or foreign bank. Restrictions are inforce on the employment of foreigners. Thereare two types of work permit – permanentand temporary – both of which are awardedon a fairly restricted basis. People applyingfor a permanent work permit must be pre-pared to invest US$50,000.

■ Attitude towards foreign investorsForeign investors have to register with theCentral Bank and declare the amount, originand purpose of the investment. All companiesand individuals not domiciled in Brazil whohold or wish to acquire property in thecountry must register at Cadastro Nacionalde Pessoas Jurıdicas (CNPJ – companiesregistry) or at Cadastro de Pessoa Fisica(CPF – natural persons registry). Foreigninvestment is banned in certain sectors.Foreign shareholdings in financial institu-tions are subject to government approval.Foreigners may set up a wholly ownedsubsidiary free from legal restrictions of anykind. However, they must hold a permanent

BRAZIL

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visa to be appointed director of a Braziliansubsidiary. As investors, they must be rep-resented by a lawyer in Brazil. Overseastransfers (capital repatriation,reinvestment,profit and dividend repatriation) are author-ised, provided the capital is registered. Apartfrom requiring Central Bank’s permission,such transfers have to be handledbyfinancial

institutions trading on the currency market.Profit and dividend transfers are not taxed.■ Foreign exchange regulationsThe flexible exchange rate system of 1999has been maintained. The Central Bankintervenes only to ensure liquidity in themarket, not to change rates. Its sole aim isto control inflation.


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OPPORTUNITY SCOPE



Mn USDMn USD


USA ChinaArgentina Netherlands Germany ArgentinaUSA China NigeriaGermany

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%

■ Machinery and electrical equipment 26%■ Petroleum and by-products 17%■ Chemicals 16%■ Transport equipment 11%■ Foodstuffs 5%■ Ores and metals 7% ■ Other 19%

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CANADA

175

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CanadaPopulation (million inhabitants): 32.9GDP (US$ million): 1,271,600


RISK ASSESSMENTIn 2007, the Canadian economy essentiallyaverted the slowdown developing in theUnited States. Wage and job growth providedsolid support for household consumption.Both residential and non-residential con-struction continued to trend up, representing25 per cent of GDP growth. The Canadiandollar appreciation undercut, however, theincrease in export revenues associated withthe soaring prices for raw materials – oil,coking coal, electricity, grain and metals –and also undermined the prices and thevolumes of traditional exports to the UnitedStates, which absorbs the highest proportionof them by far.

The economy should remain relativelyfirmin 2008. Consumption will benefit again froma bright job picture, especially in the publicsector, and from further reductions of directand indirect taxes facilitated by the publicsector financial surplus and continued debtreduction. Taking advantage of new, gener-ally more favourable amortisation rules,companies will increase their investments incommercial and office premises. Public insti-tutions will maintain a high level of spendingon infrastructure, health and education. Atightening of credit will undermine residen-tial construction (40 per cent of building andpublic works activity). Export volumes havebeen contending with the weaker demand forconstruction in the United States.

Corporate financial health is still generallygood as evidenced by the good Coface pay-ment incident index for Canada and thecontinued decline of bankruptcies. Beyondthis general economic assessmentdifferencesemerge between regions and sectors. A di-chotomy will notably persist between theWestern provinces underpinned by raw ma-terials and the Central provinces (Quebec,Ontario) very dependent on a manufacturingindustry suffering from both unfavourableexchange rates and competition from emerg-ing countries. While the aviation industryand facilities for energy production, mineoperation, construction and agriculture haveoutperformed, other sectors have fared lesswell. Car industry parts manufacturers, whodo 90 per cent of their business with thethree major North American carmakers,have suffered from the decline in localproduction and the reduction in the numberof Canadian parts contained in vehicles.Tourism has suffered from the decline in thenumber of visitors from the United States.Retailers located near the southern borderhave felt the effects of cross-border purchas-ing by Canadians. The wood industry hasbeen contending with the weaker demand forconstruction in the United States. The paperindustry has to continue restructuring dueto the decline in newsprint consumption,continuing competitive pressures and risingcosts.

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Percentage 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.8 3.2 3.0 2.8 2.5 2.2Consumption (var.) 3.0 3.3 3.9 4.2 3.9 3.2Investment (var.) 6.1 6.1 7.1 9.9 4.8 6.5Inflation 2.8 1.8 2.2 2.0 2.2 1.9Unemployment 7.6 7.2 6.8 6.3 6.0 6.0Short-term interest 3.0 2.3 2.9 4.2 4.6 4.3Public sector balance (%GDP) -0.4 0.5 1.6 0.9 0.8 0.8Public sector debt (%GDP) 76.5 72.1 70.8 65.0 60.0 57.0Exports (var.) -2.4 5.0 2.1 0.7 1.7 2.5Imports (var.) 3.8 8.1 7.1 5.0 5.0 6.5Current account balance (%GDP) 1.2 2.2 2.3 1.6 1.7 1.0


PAYMENT AND COLLECTION PRACTICESA heritage of Canada’s colonial past, its duallegal system comprises that used by 9 of the10 provinces making up the Federal state,which is inspired by British ‘common law’and that used by Quebec whose legaltraditions are based on the codifiedprinciplesof the Napoleonic code. Lower Canada’s civilcode, dating to 1 January 1866, was com-pletely revised and implemented on 1 Janu-ary 1994 as the Quebec Civil Code. Underthe British North America Act of 29 March1867, Canada was the first British colony toexercise executive and legislative powers asa federal state. The Confederation of Canadacame into effect as a dominion on 1 July1867.

■ PaymentA single law governs bills of exchange,promissory notes and cheques throughoutCanada, however this law is frequentlyinterpreted according to common law prece-dents in the nine provinces or according tothe civil code in Quebec. As such, sellers arewell advised to accept such payment methodsunless where long-term commercial rela-tions, based on mutual trust, have beenestablished with buyers. Centralised ac-counts, which greatly simplify the settlementprocess by centralising settlement procedu-res between locally based buyers and sellers,are also used within Canada.

SWIFT bank transfers are the most com-monly used payment method for interna-

tional transactions. The majority ofCanadian banks are connected to the SWIFTnetwork, offering a rapid, reliable and cost-effective means of payment, notwithstandingthe fact that payment is dependent upon theclient being in good faith insofar as only theissuer takes the decision to order payment.

A real time electronic fund transfer systemin operation since February 1999 – the LargeValue Transfer System, or LVTS – facilitateselectronic transfers of Canadiandollarscoun-trywide and can also handle the Canadianportion of international operations. The let-ter of credit (L/C) is also frequently used.

■ Debt collectionCanada’s Constitution Act of 1867, lastamended in 1982, divides judicial authoritybetween the federal and provincial Govern-ments. Thus, each province is responsible foradministering justice, organising provincialcourts and enacting the rules of civil proceed-ings in its territory. Though the names ofcourts vary between provinces, the samelegal system applies throughout the country,bar Quebec.

Within each province, provincial courtshear most disputes of all kinds concerningsmall claims, and superior courts hear largeclaims – for example, the Quebec superiorcourt hears civil and commercial disputesexceeding CAD 70,000 and jury trials ofcriminal cases. Canadian superior courtscomprise two distinct divisions: a court offirst instance and a court of appeal.

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At federal level, the Supreme Court ofCanada, in Ottawa, and only with ‘leave’ ofthe Court itself (leave is granted if the caseraises an important question of law), hearsappeals against decisions handed down bythe provincial appeal courts, or by the Cana-dian Federal Court (stating in appeal divi-sion), which has special jurisdiction inmatters concerning maritime law, immigra-tion, customs and excise, intellectual prop-erty, disputes between provinces and so on.The right of final recourse before the PrivyCouncil, in London, was abolished in 1949.

The collection process begins with theissuance of a final notice, or ‘seven-day letter’,reminding the debtor of his obligation to paytogether with any contractually agreed inter-est penalties. Ordinary legal action – even ifthe vocabulary used to describe it may varywithin the country – proceeds in threephases: first, the ‘writ of summons’ wherebythe plaintiff files his claim against thedefendant with the court, then the ‘exami-nation for discovery’, whichoutlinestheclaimagainst the defendant and takes into accountthe evidence to be submitted by each partyto the court and, finally, the ‘trial proper’during which the judge hears the adverseparties and their respective witnesses, who

are subject to examination and cross-exami-nation by their respective legal counsels, toclarify the facts of the case before making aruling.

In most cases, except when the judgedecides otherwise, each party is required tobear the full cost of the fees of his ownattorney whatever the outcome of the pro-ceedings. As for court costs, the rule stipu-lates that the winning party may demandpayment by the losing party based on astatement of expenses duly approved by thecourt clerk.

The Quebec civil code reform, in effectsince 1 January 2003, is intended to speedup and foster, by devolving a broader role onthe court, smoother court proceedings, by,for example, instituting a standard ‘originat-ing petition’ (requete introductived’instance),introducing a 180-day time limit by whichthe proceedings must be scheduled for ‘inves-tigation and hearings’ (pour enquete et audi-tion), delivering a judgement on the contentwithin a timeframe of six months after thecase was heard and encouraging the partiesto submit to a conciliation stage during legalproceedings, with the judge presiding overan ‘amicable settlement conference’ (confer-ence de reglement a l’amiable).


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ChilePopulation (million inhabitants): 16.5GDP (US$ million): 145,841


STRENGTHS• The world’s leading copper producer,

Chile is endowed with abundant mining,agricultural, piscicultural (notablysalmon) and forestry resources, as well ascomparative advantages in those areas.

• The country has benefited from economicexpansion for the past 20 years, coupledwith a relative consensus on the orthodoxeconomic policy pursued.

• The growing number of free-tradeagreements has facilitated geographicand sectoral diversification of exports.

• Political stability, quality institutionsand infrastructure and a solid financialsystem have fostered foreign investmentin the country and its development as aregional 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 countryremains dependent on foreign sources,particularly Argentine gas, pending theproduction start up of a liquefied naturalgas facility in 2009–2010.

• The income gap – still among the world’shighest due especially to disparities inthe education system – has been a sourceof social tensions.

RISK ASSESSMENTAmid the world economic slowdown, theChilean economy should grow at a moremoderate rate this year. A good employmentpicture will continue to buoy householdconsumption growth, albeit at a slower pace.Public consumption and investment shouldmoreover increase, with government officialsleveraging the windfall from high copperprices to accentuate social spending andinfrastructure modernisation. New copperand cellulose production capacity will alsomake a contribution. High food and energyprices compounded by the firmness of privateconsumption have, however, generated infla-tionary pressures that resulted in a tighten-ing of monetary policy.

Strict application in recent years of a fiscalsurplus rule has facilitated reducing public

debt down to 5 per cent of GDP, with twostabilisation and investment funds set up in2007 to improve management of the resultingsurpluses. Furthermore, although sales ofcopper continue to dominate foreign trade,sales of other products like salmon, woodpulp and wood have been booming. Thedynamism of Asian demand will give themfurther impetus notably under free-tradeagreements concluded with China late 2006and Japan a year later. The country is,however, still very dependent on imports ofArgentine gas with uncertainty clouding itssupply. External accounts will nonethelesscontinue to show large surpluses despiteprofit repatriation by foreign companies,while foreign debt ratios, essentially attrib-utable to private borrowing, have continuedto improve.

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In office since March 2006 and a memberof the centre-left coalition in power since1990, President Michelle Bachelet’s popular-ity has been in decline due notably toproblems with the capital’s new public trans-portation system, Transantiago. The Presi-dent moreover has to contend with manypolitical and social challenges. The pace ofreform, particularly of the education, healthand pension systems, could lag in the run-up

to municipal elections late this year and thepresidential election end 2009.

In this context, the mining and paperindustries, construction, food, distributionand financial services have outperformed.The Coface payment experience on compa-nies has been very satisfactory and theirsolvency has remained good, except for weak-nesses in a few sectors like textiles andclothing industry.



Economic growth (%) 3.3 6.2 5.7 4.0 5.4 4.6Inflation (period end rate) 1.1 2.4 3.7 2.6 5.9 4.0Public sector balance (%GDP) -0.4 2.2 4.7 7.7 5.0 3.0Exports 21.7 32.5 41.3 58.1 67.4 70.2Imports 17.9 22.9 30.5 35.9 41.5 47.8Trade balance 3.7 9.6 10.8 22.2 25.8 22.4Current account balance -0.8 2.1 1.3 5.3 7.4 5.7Current account balance (%GDP) -1.1 2.2 1.1 3.6 4.4 3.0Foreign debt (%GDP) 58.8 45.7 37.8 32.6 28.5 26.0Debt service (%Exports) 13.9 9.6 13.8 14.6 10.7 6.7Foreign exchange reserves (in months of imports) 6.4 4.9 4.0 3.4 2.8 2.6



■ Market overviewThe Chilean market is secure and stable.The political and economic situation, goodinfrastructure and very few changes in lawsand regulations create a business-friendlyenvironment, especially for small- and me-dium-sized companies. Chile has limitedtariff protection and pursues unilateralmeasures to cut import duties, backed bybilateral and regional trade agreements.Since 1 January 2003, the uniform rate ofcustoms duty for all products is 6 per cent.Moreover, following ratification by Chile’sparliament of the free-trade agreement withthe European Union, the trade provisions ofwhich have been in force since 1 February2003, duties on 99.8 per cent of industrialgoods have been abolished.

■ Means of entryNon-tariff barriers are few and far between.A number of regulations on foodstuffs, sim-

ilar at times to non-tariff barriers, are inplace (type approval and sampling proce-dures). Compared with the other countriesof the region, Chile offers fairly adequateintellectual property protection. A new in-dustrial property act (No. 19.996) was pub-lished in March 2005. It supplements the1991 act and enables Chile to bring itsdomestic legislation into line with WTOTRIPS) agreements. Backed by the imple-menting decrees of 1 December 2005, thisground-breaking law will provide better in-tellectual and industrial property protec-tion, though there is room for improvementin pharmaceuticals.

■ Attitude towards foreign investorsThere is equal treatment for foreign and localinvestors, tie-ups with local companies beingoptional. Foreign investment status, withinthe meaning of Decree-Law 600, applies todeals in excess of US$5 million. Capitalinflows below this figure, but aboveUS$10,000, must be declared to the Central

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Bank, although the regulations have beenrelaxed. The one-year lock-in period forcapital having entered the country after 2000has been abolished and the compulsoryreserve requirement (Encaje) scrapped. Theutilities’ privatisation and concession pro-gramme continues to offer foreign investorsstart-up opportunities, even though most ofthe lucrative concessions have already beenawarded. Corporation tax is 17 per cent.Moreover, some regions benefit from invest-ment incentives (VAT exemption, etc) underregional development aid programmes. La-bour legislation is not burdensome in termsof social security contributions, despite theintroduction of unemployment benefits in2002 and the increase in severance pay underthe recently revised labour code. Employer

social security contributions are extremelylow and limited to industrial accident protec-tion. Since 2002, the government has beenlooking to provide incentives for foreign startups in the country. One such initiative is theinvestment hub act adopted in 2002 thataims to turn Chile into a regional investmenthub. Provided they meet a number of strictcriteria, foreign companies investing fromChile in neighbouring countries are exemptfrom tax on profits generated outside.

■ Foreign exchange regulationsThe Central Bank abandoned the peso’scrawling peg in September 1999. Theexchange rate is now determined by themarket alone, with the monetary authoritiesintervening only on an exceptional basis. Allcustomary means of payment are used.


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OPPORTUNITY SCOPE




USA ChinaJapan SouthKorea

Netherlands ArgentinaUSA Brazil PeruChina

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%

■ Foodstuffs and agricultural raw materials 7%■ Fuels 22%■ Ores and metals 4%■ Chemicals 12%■ Machinery and transport equipment 36%■ Other manufactured goods 20%

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Indicators Chile Regional averageEmerging

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ColombiaPopulation (million inhabitants): 45.6GDP (US$ million): 135,836

Country @rating: A4Medium-term rating: Moderately high riskBusiness climate rating: B

STRENGTHS• Colombia boasts great natural wealth,

particularly agricultural and miningresources.

• The country has diversified its exports inthe ATPDEA framework – the AndeanTrade Promotion and Drug EradicationAct – to become the leading AndeanCommunity manufacturing power.

• The government has pursued a policy ofconsolidating public finances, graduallyreducing inflation and strengthening thefinancial sector.

• Colombia has benefited from substantialAmerican military aid to eradicate drugproduction and smuggling and combatthe guerrilla movement, and that aidcould be partially re-directed to civildevelopment programmes.

WEAKNESSES• The security situation is still a problem

due to the presence of Latin America’slargest guerrilla movement, the FuerzasArmadas Revolucionarias de Colombia(FARC) and the climate of violencelinked to drug smuggling.

• The poverty afflicting half thepopulation, a large wage gap and thewide gulf between urban and rural areashave undermined the country’scohesiveness.

• To improve the public finance situation,tax reforms remain necessary especiallyto endow public spending with greaterflexibility and broaden the VAT base.

• The banking sector continues to beweakened by its exposure to sovereignrisk.

RISK ASSESSMENTGDP growth should remain relatively strong,driven by private consumption and invest-ment, with the inflationary pressures stokedby firm domestic demand and high-produc-tion capacity utilisation prompting a tight-ening of monetary policy. While externalaccounts may have deteriorated, exports areincreasingly diversified, coal production hasbeen rising and oil production is expected toimprove, as the opening for sale to the privatesector of 20 per cent of the shares in Ecopetrolshould allow the state-owned company toincrease its investments. Foreign direct in-vestment inflows should cover half the coun-try’s growing financing needs with borrowingin international financial markets covering

the rest albeit at less favourable conditionsdue to the turmoil. Debt ratios, although stillhigh compared to exports, have nonethelessbeen improving.

The government led by conservative Pres-ident Alvaro Uribe, re-elected in May 2006,has pursued orthodox economic policy. Pro-gress on tax reforms has, however, met withstiff resistance from the presidential coa-lition in parliament although they remainnecessary to reduce the fiscal deficit anda still-high public debt that representednearly 50 per cent of GDP in 2007 but whosestructure and profile have, however, tendedto improve.

The political and social situation is stilldifficult due notably to the continuing high

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level of insecurity despite the weakeningof the FARC guerrilla movement. Reve-lations of ties between members of theUribe administration and paramilitarygroups have not only shaken the parlia-mentary majority, they have delayed rat-ification by the United States Congress ofthe free-trade agreement intended to re-

place ATPDEA whose validity has beenextended.

Corporate solvency, meanwhile, shouldremain satisfactory with companies meetingtheir payment obligations on time. Construc-tion will remain the most dynamic sector,followed by retailing, oil and mineral extrac-tion, telecommunications and services.



Economic growth (%) 3.9 4.9 4.7 6.8 6.5 5.5Inflation (period-end %) 6.5 5.5 4.9 4.5 5.3 4.4Public sector balance (%GDP) -4.7 -4.3 -4.8 -4.1 -3.4 -4.0Exports 13.8 17.2 21.7 25.2 28.4 29.8Imports 13.3 15.9 20.1 24.9 30.8 34.3Trade balance 0.6 1.3 1.6 0.3 -2.4 -4.5Current account balance -1.0 -0.9 -1.9 -3.1 -5.1 -6.8Current account balance (%GDP) -1.2 -1.0 -1.5 -2.3 -3.0 -3.8Foreign debt (%GDP) 47.9 40.2 31.3 29.4 24.6 25.2Debt service (%Exports) 41.5 25.0 25.2 19.7 18.2 17.1Foreign exchange reserves(in months of imports)

6.3 6.5 5.7 5.4 5.2 5.1



■ Market overviewPresident Uribe’s second term has beenmarked by a revival in investment, strongGDP growth and a widening of the tradedeficit on the back of rising imports. It shouldbe noted, however, that the bulk of importsconsists of capital goods which contribute tothe modernisation of the country’sproductionfacilities.

■ Means of entryThe few barriers to trade that remain arisemainly from the legal uncertainty created byfrequent parliamentary changes, as well asthe plethora of government bodies and play-ers. This is especially true of taxation, wherea new reform, the third in as many years,has been passed by Congress. This lawsimplifies VAT and income tax by wideningthe tax base and reducing the number of taxbrackets.

To provide visibility for companies in achanging legal context, Congress has passed

a law offering a stable legal framework forboth foreign and domestic investment.Underthe new law, an investor who has enteredinto a legal stability agreement with theColombian government containing a vitalstability clause will be entitled to compensa-tion if that clause is amended. In the opinionof the constitutional court, however, the newtax provisions apply to investments undercontract, with compensation claims by com-panies being settled through arbitration orthe courts.

■ Attitude towards foreign investorsAll sectors of the economy are open to foreigninvestment, except for defence and the proc-essing of toxic, hazardous or radioactivewaste not produced in the country. Invest-ment in financial services, oil and gas andmining is subject to prior government ap-proval.

■ Foreign exchange regulationsThe country has a floating exchange ratesince 1999.

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OPPORTUNITY SCOPE



Mn USDMn USD


USA EcuadorVenezuela Peru Mexico MexicoUSA Brazil VenezuelaChina

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%

■ Machinery and transport equipment 40%■ Chemicals 21%■ Foodstuffs 9%■ Manufactured goods 23%■ Other 8%

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Indicators Colombia Regional averageEmerging

country average


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Costa RicaPopulation (million inhabitants): 4.4GDP (US$ million): 22,14


RISK ASSESSMENTThe country’s economic and financial outlookhas improved with the approval end 2007 inCosta Rica of DR-CAFTA, the free-tradeagreement between the Central Americancountries and the United States. Foreigninvestors, already attracted by the country’sstable political institutions, good social indi-cators and a satisfactory business environ-ment, should benefit from the liberalisationof the electricity, telecommunications andinsurance sectors.

Growth should remain relatively strongamid strong consumption and investment. Apersistent fiscal deficit is attributable to thenarrowness of the tax base and the rigidityof public spending, while the still-pendingfiscal reform would contribute to reducingthe public debt burden (45 per cent of GDPin 2007 and half denominated in foreigncurrencies). Although external accounts

ought to benefit from the good performanceof technological-product exports and tourismrevenues, they have suffered from the extentof oil purchases and profit repatriation bymultinationals, with the net result of asubstantial current account deficit. The in-flux of foreign direct investment should,however, largely cover external financingneeds. Foreign debt ratios will moreoverremain moderate and the adoption of a moreflexible foreign exchange system will allowthe Central Bank to exercise better controlover inflation. Although the banking systemis still weakened by extensive dollarisation,oversight and performance have improved.Although Centre-right President OscarArias, in office since May 2006, does not enjoymajority support in the unicameral congress,positive fallout from the free-trade agree-ment approval might allow him to go forwardwith certain reforms.



Economic growth (%) 6.4 4.3 5.9 8.2 5.9 4.8Inflation (average annual rate) 9.4 12.3 13.8 11.5 9.2 8.0Public sector balance (%GDP) -3.1 -2.5 -1.6 -1.1 -1.0 -0.7Exports 6.2 6.4 7.1 8.2 9.2 9.9Imports 7.3 7.8 9.2 10.8 11.8 12.3Trade balance -1.1 -1.4 -2.1 -2.6 -2.6 -2.4Current account balance (%GDP) -5.0 -4.3 -4.9 -4.8 -5.0 -4.6Foreign debt (%GDP) 30.9 30.1 30.6 28.5 26.7 24.9Debt service (%Exports) 9.0 8.6 5.3 6.5 5.2 3.9Foreign exchange reserves(in months of imports)

2.3 2.4 2.5 2.9 3.4 3.8


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CubaPopulation (million inhabitants): 11.3GDP (US$ million): 3,295


STRENGTHS• Cuba boasts great natural wealth

including mining resources (mainlynickel and cobalt), agriculture (sugar,tobacco) and fishing (rock lobster).

• A developed tourist sector constitutes animportant source of foreign currency.

• Compared to other regional countries theeducation level of the workforce issatisfactory, as are the social indicators.

WEAKNESSES• The country has been vulnerable to

external shocks due to its dependence onraw materials with volatile prices,tourism and oil imports.

• Cuba has limited access to externalfinancing due to amount of debt inarrears.

• The de-dollarisation initiated end 2004with the creation of two currencies hasincreased the distortions within thatcentralised economy.

• How succession to President Fidel Castroand the embargo imposed by the UnitedStates play out constitute major factorsof uncertainty.

RISK ASSESSMENTBy ‘temporarily’ delegating the presidency tohis younger brother Raul end July 2006,Fidel Castro triggered a succession processthat could lead to a more pragmatic approachto economic policy.Investment, along with household spending,will drive more moderate growth in 2008.Construction and infrastructure should ex-pand, while agriculture should experience arecovery. Although continuation of the Amer-ican sanctions will hamper the economy, theupcoming presidential election in the UnitedStates in November 2008 could open awindow of opportunity for greater flexibilityon that score.

Economic management could be the sub-ject of gradual adjustments, particularly ofprices and exchange rates, to improve the

efficiency of the economic apparatus andraise living standards. The growth of taxreceipts and contributions by state-ownedcompanies will facilitate keeping a lid on thefiscal deficit. Although the international fi-nancial turmoil has relatively limited impacton external accounts, foreign trade remainsstructurally in deficit due to the highvolumesof imported capital goods and food, mainlyfrom China, and oil from Venezuela. Reve-nues derived from services, tourism, andtransfers by exiles have, however, made itpossible to limit a current account deficit,financed notably by foreign direct investmentinflows. With Cuba only able to obtain short-term external financing and then only to alimited extent, its debt ratios (excludingRussian debt) should continue to decline.

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USD billions or % 2002 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.5 2.9 4.3 8.6 11.1 7.0 5.4Inflation (period-end rate) 7.0 -1.0 2.9 3.7 5.7 4.8 4.0Public sector balance (%GDP) -3.2 -3.3 -4.2 -4.5 -3.8 -3.2 -3.0Exports 1.4 1.7 2.2 2.0 2.8 3.3 3.6Imports 4.1 4.6 5.6 7.5 9.4 10.9 11.7Trade balance -2.7 -2.9 -3.4 -5.5 -6.7 -7.6 -8.1Current account balance -0.7 -0.3 -0.3 -0.3 0.1 -0.7 -1.0Current account balance (%GDP) -2.3 -1.1 -1.0 -0.9 0.2 -1.6 -2.0Foreign debt (%GDP)* 38.4 37.8 43.0 40.1 37.8 36.0 35.0Debt service (%Exports) 15.9 37.1 29.5 27.7 21.9 20.3 20.7Foreign exchange reserves(in months of imports)

1.2 1.3 3.9 4.0 3.7 3.3 3.2

e = estimate, f = forecast, *ex Russian debt


■ Means of entryCuba is one of the founding members of theWTO. It maintains trade relations witheverycountry in the world, except the UnitedStates, which has imposed a trade embargoagainst it for the last 40 years. The extrater-ritorial provisions of the Helms-Burton Actcreate legal uncertainty, even though TitleIII of the act was suspended by the USgovernment in 1996. Since late 2001, theUnited States allows sales of foodstuffs andpharmaceuticals and is now the island’sbiggest food supplier. The country’s importregulations are very restrictive, with theCuban State exercising tight controls (licens-ing, import boards by product and sector, etc)and determining priority sectors. The ratesof customs duty are generally quite favoura-ble. The country has significant paymentproblems, which vary greatly from one cred-itor to another. As Cuba is not eligible forfunding from international institutions suchas the World Bank and the IMF on accountof the US veto and has run up debt arrearswith some of its partners, it must raiseprivate short-term loans (12–24 months)with high rates against real securities or findnew partners for long-term loans. Suchpartners remain wary due to the country’sselective default policy. The preferred meansof payment for foreign trade is irrevocable

documentary credit confirmed by a leadingbank. Exchange controls, in force since July2003, require Cuban firms and agencies toseek central bank approval for foreign tradepayments. This measure was tightened inJanuary 2005 through the introduction of asingle foreign currency account held with theCuban Central Bank, where all income inconvertible currency earned by Cuban under-takings is deposited. All import applicationsare now vetted by an approvals committeechaired by the Cuban Central Bank.

■ Attitude towards foreign investorsCuba has encouraged foreign investmentonly for the last 12 years and has concludedbilateral investment promotion and protec-tion agreements with 53 countries, includingFrance. Sectors that have attracted foreigndirect investment include tourism, basicindustry, energy, telecommunications, agri-foods and banking. In general, training,health care and services are closed to foreign-ers. Foreign investment is regulated by strictprocedures requiring compliance with tech-nology transfer, capital contribution andexport development criteria. The volume ofFDI in Cuba is fairly small and barelyamounts to $5.5 billion since the opening upof the country’s market. There has recentlybeen a surge of interest from Canada andVenezuela (nickel, oil). The government re-serves the right to grant, renew or refuse

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licences to foreign entities (representations,branches, mixed enterprises, economic asso-ciations, etc). The tax system does not dis-criminate against foreign investors and isone of several incentives. Activity in the freezones has declined sharply. Labour, suppliedby the government after complex formalities,is on the whole skilled. Employees get only afraction of the invoiced amount from thegovernment and lack motivation if they arenot paid a bonus directly.

■ Foreign exchange regulationsYear 2004 marked the end of the dollar’scirculation in the Cuban economy for allcash payments. There are two currenciesin Cuba: the CUC (Cuban peso convertibleonly in Cuba worth US$1.08) and the CUP(domestic peso with a value of CUP 24 tothe CUC). Food staples, essential goods andpublic services (urban transport, water, gas,

electricity, telephone) are heavily subsidisedby the state and denominated in CUPs. Allother available goods are payable in CUCs.A 10 per cent surcharge is levied by bankson exchange transactions involving the USdollar. This charge is not applied to theother freely convertible currencies recog-nised by the Cuban government (euro,Swiss franc, sterling, Canadian dollar).Exchange rates for other currencies are cal-culated by reference to their movementsagainst the US dollar. The government isplanning several revaluations of the CUPagainst the CUC with a view to unifyingthe two currencies eventually. However,this is inconceivable for the next two–threeyears at least. In summary, CUC 1 is worthUS$1.08 and CUP 24. The rate for the eurois calculated as follows: €1 = $/€ daily rate× 0.9259 (CUC/US$).

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OPPORTUNITY SCOPE



Mn USDMn USD


Netherlands VenezuelaCanada China Spain ChinaVenezuela Spain ItalyCanada

EXPORTS by products■ Nickel 47%■ Foodstuffs (excluding sugar and tobacco) 14%■ Tobacco 9%■ Sugar 8%■ Medicines 5% ■ Chemicals 8%■ Other 10%

■ Machinery and equipment 33%■ Fuels 24%■ Foodstuffs 14%■ Chemicals 7%■ Other 22%

IMPORTS by products

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Indicators Cuba Regional averageEmergingcountry average

GNP per capita (PPP dollars) 10,070 8,916 5,983GNP per capita (USD) 3,660 4,803 2,313Human Development Index 0.826 0.789 0.672Wealthiest 10% share of national income n/a 42 31Urban population percentage 76 78 44Percentage under 15 years old 19 30 30Number of computers per 1,000 inhabitants 33 92 50

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Dominican RepublicPopulation (million inhabitants): 9.6GDP (US$ million): 30,581


RISK ASSESSMENTAfter the catch-up process in recent yearsresulting from the bank crisis of 2003,economic growth should be less brisk in 2008due notably to the economic slowdown in theUnited States, the country’s number onetrading partner. Domestic demand shouldnonetheless be the main growth engine. Withthe high price of oil and the reconstructionneeded to repair the damage done by thehurricanes late last year, maintaining pru-dent monetary and fiscal policy will not be asimple matter. It will, however, have to staywithin the framework of the confirmationagreement renewed with the IMF early thisyear.

There has been notable, albeit precarious,improvement in public finances with thepublic debt declining in relation to GDP,down to 40 per cent in 2007. The realchallenge will be to persevere with the fiscalconsolidation during an electoral period asthis year. The country has benefited, mean-while, from the high nickel prices along withlarge revenues from tourism and expatriateremittances. The coming into force in 2007 ofthe DR-CAFTA, the free-trade agreementbetween the Dominican Republic, CentralAmerica and the United States should giverise to additional inflows of foreign directinvestment. After the rescheduling grantedby the Paris Club public creditors and the

London Club private creditors in 2005, for-eign debt ratios have continued to improve,thanks to strong growth. The country’s otherrecent achievements moreover include finan-cial system consolidation, the strengtheningof bank regulation and oversight and thecentral bank recapitalisation, which shouldbolster its independence and credibility.

The country remains nonetheless depend-ent on oil imports that weigh on externalaccounts despite the preferential accordsconcluded with Venezuela. Textile and shoeexports from customs-free zones have suf-fered meanwhile from Chinese competition.In a turbulent international environment,relying on short-term financing to cover partof the current account deficit will be morecostly. And cumbersome bureaucracy andwidespread corruption highlight the publicsector’s ineffectiveness. Progress has beenmade, however, in distributing electricity,with reducing fraud, and renegotiating long-term contracts.

In this context, most of the population hasnot benefited from the fruits of the economicexpansion, which has heightened social ten-sions and in some ways the level of insecurity.Reforms thus remain necessary but makingprogress will be difficult in the run-up to thepresidential election mid-2008, which shouldresult in the re-election of the incumbentLeonel Fernandez (of the centre-left PLD –Partido de la Liberacion Dominicana).

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Economic growth (%) 0.5 1.2 9.5 10.7 8.0 4.6Inflation (average annual rate) 27.5 51.4 4.2 7.6 6.0 6.7Consolidated public balance (%GDP) -8.7 -7.6 -3.1 -3.5 -1.0 -1.3Exports 5.4 5.9 6.1 6.4 7.1 7.3Imports 7.6 7.9 9.9 11.2 12.3 13.0Trade balance -2.2 -2.0 -3.7 -4.8 -5.3 -5.7Current account balance (%GDP) 5.1 4.7 -1.4 -2.2 -3.0 -4.0Foreign debt (%GDP) 36.0 44.5 34.8 34.7 31.3 28.8Debt service (%Exports) 12.0 11.0 10.6 12.9 11.5 11.4Foreign exchange reserves (in months of imports) 0.3 1.0 1.9 2.0 2.3 2.2


ECUADOR

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EcuadorPopulation (million inhabitants): 13.4GDP (US$ million): 40,800


STRENGTHS• Ecuador boasts extensive resources –

mining, gas and especially oil – withcompletion of the trans-Andean pipelinesupposed to facilitate increasedproduction and exports.

• World-leading exporter of bananas andshrimps, the country is also endowedwith rich fishing areas especially fortuna.

• The economy’s dollarisation has notablycontributed to limiting inflation andcapital flight.

• Rising wages and easier access to credithave spurred household consumption.

WEAKNESSES• Insufficiently diversified, the economy

has been vulnerable to fluctuations inraw materials prices, particularly for oil.

• Chronic political instability has notfacilitated economic and financialconsolidation and has hampered progresson reforms.

• A lack of infrastructure and skilledlabour compounded by a poorinstitutional and legal environment hasdeterred local and foreign investors.

• Ecuador suffers from a chronic shortageof foreign exchange reserves, ashortcoming nonetheless mitigated bythe dollarisation.

• Regional disparities, marked inequalityand social tensions have undermined thecohesiveness of this multiethnic country.

RISK ASSESSMENTThe anti-liberal left-wing President RafaelCorrea began his four-year term in January2007. The election victory of his Acuerdo Paismovement late September 2007 led to theinstitution of a Constituent Assembly withearly general elections likely in 2008.

Despite public spending buoyed by higheroil revenues, economic growth should belimited due to a smaller rise in privateconsumption attributable to a decline inexpatriate transfers and bank credit, alongwith a reduction in corporate investmentamid the current political and economicuncertainties.

The profit sharing with international oilcompanies was revised again in favour of the

State in October 2007 and the countryrejoined OPEC end 2007. The oil wealthshould contribute to an increase in socialspending but without jeopardising the fiscalsurplus for the time being. There is nonethe-less still uncertainty as to Ecuador’s inten-tion to fully honour its obligations inconnection with foreign debt, even if officialsseem aware of the negative impact of anyunjustified restructuring. The suspension ofnegotiations on a free-trade agreement withthe United States, the country’s main tradingpartner, will affect its exports and its trade,and current account surpluses shouldshrink.And unless the Andean Trade Promotion andDrug-Eradication Act (ATPDEA) is extendedbeyond March 2008, Ecuador will lose its

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preferential access to the North Americanmarket.

In this troubled context, the macroeco-nomic improvement achieved in recent years

could be in jeopardy from 2009. In a periodof international financial turmoil, that pros-pect could trigger a crisis of confidence infinancial markets.



Economic growth (%) 3.6 8.0 6.0 3.9 2.4 2.6Inflation (period-end rate) 6.2 1.9 3.1 2.9 2.7 2.6Public sector balance (%GDP) 1.6 2.1 0.7 3.3 2.6 1.6Exports 6.4 8.0 10.5 13.2 13.6 14.2Imports 6.4 7.7 9.7 11.4 12.6 13.6Trade balance 0.1 0.3 0.8 1.8 1.0 0.6Current account balance -0.4 -0.5 0.3 1.5 0.7 0.3Current account balance (%GDP) -1.5 -1.6 0.9 3.8 1.7 0.7Foreign debt (%GDP) 58.4 52.1 47.2 41.8 41.2 40.5Debt service (%Exports) 21.3 17.7 18.6 13.4 13.2 21.3Foreign exchange reserves(in months of imports)

1.0 1.1 1.5 1.1 2.2 2.4



■ Means of entryEcuador is a founding member of the AndeanCommunity of Nations (ACN) and, in princi-ple, follows WTO rules since accession in1996. While trade with its ’full’ ACN partners– Colombia and Bolivia – has been fullyexempt from customs duties since 1994, itcontinues to be hampered by a host of ad hoctariff and non-tariff barriers.

The customs nomenclature used by Ecua-dor is that initially set out in decision 381 ofthe Cartagena agreement (Junta del Acuerdode Cartagena) known as NANDINA (Com-mon Nomenclature of the Member Countriesof the Cartagena Agreement), replaced inDecember 2003 by decision 570 of the ACN,and published in the Official Journal asExecutive Decree 693 of 9 December 2005.This nomenclature simplifies the identifica-tion and classification of goods, foreign tradestatistics and other ACN trade policy meas-ures concerning the import and export ofgoods.

Ecuador’s tariff levels are based on tech-nical criteria such as degree of transforma-

tion. Duties for agricultural products are 15and 20 per cent, those for semi-finishedproducts 10 per cent, while raw materials,factors of production and capital goods areliable to customs duty that is currently ashigh as 30 per cent for certain capital goods.For vehicles, the level of duty is 35 per centon cars, 10 per cent on trucks and 3 per centon completely knocked down (CKD) kits. TheACN countries (Colombia, Ecuador, Peru,Bolivia) adopted a common external tariff(AEC or Arancel Externo Comun) in Febru-ary 1995, which is no longer in effect (sinceSeptember 2007).

Since December 2003, a foreign tradeinformation system (SICE) is in operation.This system enables import documents andcustoms declarations to be submitted elec-tronically. Nonetheless, import proceduresremain lengthy. Ecuador runs a somewhatcomplex system of controls, prohibitions,authorisations and permits. Moreover, fre-quent changes in legislation create a highdegree of legal insecurity. Acting through theforeign trade and investment board (COM-EXI), Ecuador has adopted resolutions 182

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2

and 183 on banned products and priorlicensing, respectively.

■ Attitude towards foreign investorsIn theory, non-discrimination between do-mestic and foreign investors is more or lessthe norm, except in so-called strategic sectors(ban on property ownership along the bor-ders). In practice, however, this liberalism isundermined by a highly complex legal and

judicial system that breeds uncertainty. Thehigh concentration of political, economic andfinancial power can also distort applicationof the law.

■ Foreign exchange regulationsThe use of the US dollar as the officialcurrency provides a certain degree of mone-tary stability.

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OPPORTUNITY SCOPE



Mn USDMn USD


USA ColumbiaPeru Chile Russia ColombiaUSA Venezuela ChinaBrazil

EXPORTS by products■ Fuels 59%■ Fruits 10%■ Fishing products 6%■ Canned fish 5%■ Flowers 3%■ Other 17%

■ Raw materials 31%■ Capital goods 25%■ Consumer goods 23%■ Fuels 20%■ Other 1%

IMPORTS by products

010002000300040005000600070008000

0

500

1000

1500

2000

2500

3000



Indicators Ecuador Regional averageEmerging

country average


EL SALVADOR

197

2

El SalvadorPopulation (million inhabitants): 7.0GDP (US$ million): 18,306


RISK ASSESSMENTGDP growth will suffer a downturn mainlyattributable to the economic slowdown in theUnited States, upon which the country re-mains very dependant, notably as a marketfor nearly 60 per cent of its exports. In thatdollarised economy, domestic demand willremain the growth engine, with increasedpublic spending in the run-up to generalelections early 2009 supposed to offset theslower growth of private consumption,attrib-utable to the deceleration of transfers fromexpatriates in the United States. Althoughthe construction sector will be less dynamicin this context, agriculture, commerce, trans-port and services will remain relativelybuoyant. Having suffered from Asian com-petition after the Multifibre Agreement ex-pired, the maquiladoras – assembly units inthe textile sector – undertook restructuringthat has begun to pay off.

The tight fiscal policy pursued by thegovernment in liaison with the IMF hasallowed it to reduce the fiscal deficit andrelatively high public debt, representing anestimated 41 per cent of GDP in 2007. Thetrade deficit, meanwhile, will continue towiden with imports spurred by strong domes-

tic demand, oil purchases and buying abroadassociated with the country’s integration intoDR/CAFTA, the free-trade area agreed be-tween Central America and the UnitedStates. The volume of expatriates’ remit-tances and the development of tourism willonly make possible a slight reduction in thelarge current accountdeficitand,withforeigndirect investment only expected to cover halfthe substantial external financing needs,borrowing at less favourable conditions willbe necessary to cover the balance. The foreigndebt burden should, however, decline some-what and the banking system has grownstronger particularly since the acquisition in2007 of the three major local banks byBancolombiano, Citibank and HSBC.

President Antonio Saca has remained rel-atively popular but, lacking a parliamentarymajority, his right-wing party, Arena, hashad to enter into alliances. That situationhas not facilitated progress on reforms,particularly of the pension and educationsystems, which would contribute to easingthe poverty afflicting one-third of the popu-lation and thereby to easing the level ofinsecurity, linked particularly to the exis-tence of maras, very violent youth gangs.

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Economic growth (%) 1.7 1.5 2.8 4.2 3.4 3.0Inflation (%) 2.5 5.4 4.3 4.9 4.2 4.0Public sector balance (%GDP) -3.6 -3.0 -3.0 -2.9 -2.2 -1.9Exports 3.2 3.3 3.4 3.6 3.9 4.3Imports 5.4 6.0 6.4 7.3 7.9 8.5Trade balance -2.3 -2.7 -3.0 -3.7 -4.0 -4.2Current account balance (%GDP) -4.7 -4.0 -4.7 -4.6 -5.8 -5.5Foreign debt (%GDP) 57.2 56.1 53.4 51.7 50.6 49.1Debt service (%Exports) 13.1 20.1 13.4 16.1 15.6 15.3Foreign exchange reserves (in months of imports) 3.9 3.6 3.1 3.0 3.2 3.1


GUATEMALA

199

2

GuatemalaPopulation (million inhabitants): 12.9GDP (US$ million): 35,290

Country @rating: BMedium-term rating: Moderately high riskBusiness climate rating: C

STRENGTHS• Implementation since July 2006 of DR/

CAFTA the Central American free-tradeagreement with the United States opensup new opportunities for Guatemala andshould attract more foreign directinvestment.

• The government has pursued prudenteconomic policy and public debt hasremained at manageable levels, under20 per cent of GDP.

• External debt ratios have been moderatewith foreign exchange reservesremaining 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 tooconcentrated on traditional agriculturalproducts – coffee, bananas and sugar –and thus exposed to fluctuations in theirprices.

• Ethnic, social and geographic cleavagesrun deep with poverty affecting half thepopulation and the country remainingvery inegalitarian.

• Although representing 60 per cent of thetotal population the Indians remainmarginalised, despite commitmentsmade in the 1996 peace treaty on theirbehalf.

• Marked by the repercussions of 30 yearsof civil war, the country has sufferedfrom deficient infrastructure and greatinsecurity.

RISK ASSESSMENTGrowth should slow slightly due in 2008amid the economic slowdown in the UnitedStates, the country’s number one tradingpartner. Economic activity will be drivenby private investment, spurred by the DR/CAFTA free-trade agreement, householdconsumption – despite slower growth oftransfers from expatriates in the UnitedStates – and public spending. Restrictivemonetary policy will not suffice to signifi-cantly reduce the inflationary pressuresgenerated by high oil and food prices.

The government of the new centre-leftPresident Alvaro Colom, in office since Jan-uary 2008, should pursue policy focused onmaintaining macroeconomic stability in li-aison with the IMF. The main fiscal policyobjective is still to increase revenues (thatnow represent only 10 per cent of GDP) andreduce both the weight of the informal econ-omy and tax evasion, to free up funds foressential social spending. A foreign tradeimbalance will persist due to the high vol-ume of imports of consumer and capitalgoods and of refined oil, even with exports

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benefiting from the relatively high prices forfarm products that will result in a markedwidening of the current account deficit de-spite the extent of expatriate remittances.Foreign investment inflows will, however,only cover one-quarter of external financingneeds, and it will be more difficult to turnto international markets for the balance dueto the turmoil currently affecting them.

Like his predecessor, President Colom willhave limited room for manoeuvre with hisparty – Unidad Nacional de la Esperanza –lacking a parliamentary majority, which willnot facilitate progress on a range of reformsconcerning agriculture, the legal system andsecurity.



Economic growth (%) 2.2 2.6 3.2 5.0 5.6 4.9Inflation (period-end rate) 5.9 9.2 8.6 5.8 7.2 6.3Public sector balance (%GDP) −2.4 −1.0 −1.0 −1.4 −1.7 −1.6Exports 3.1 3.4 3.7 4.0 4.3 4.9Imports 6.7 7.8 8.8 9.9 10.8 11.7Trade balance −3.7 −4.4 −5.1 −5.9 −6.5 −6.9Current account balance −1.0 −1.2 −1.4 −1.6 −1.7 −2.1Current account balance (%GDP) −4.2 −4.5 −4.4 −4.4 −4.5 −5.2Foreign debt (%GDP) 25.0 33.0 32.6 33.0 34.6 35.4Debt service (%Exports) 8.3 8.5 9.0 12.1 12.5 13.0Foreign exchange reserves (in months of imports) 4.3 4.6 4.4 4.2 4.1 4.0



■ Means of entryThe trade policy of Guatemala, a WTOmember since 1995, is based on genuinemarket liberalisation. This is reflected in theaverage rate of customs duty which, in thelast 20 years, has fallen from 27 to 5.5 percent. The country gives all its trading part-ners most favoured nation (MFN) treatment.Custom duties (0, 5, 10, 15, 20 and 40 percent) are set by the Central American importduty code, itself based on the harmonisedsystem (HS) for the designation and codifi-cation of goods. The highest duties are leviedon a handful of sensitive products (the ratefor rum, for instance, is 40 per cent). Thereare no import licences. Imported productsare liable to domestic taxes. Twelve per centVAT is charged on the CIF value of goods.Products such as alcoholic beverages andvehicles are liable to additional taxes. Food-stuffs must be enrolled on the health registerat the Ministry of agriculture, animal hus-bandry and food. There is no pre-shipment

inspection requirement, but a label must bedisplayed on each package stating the prod-uct’s name, sell-by date, composition, nutri-tional 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 warn-ing. The main problems reported by import-ers are congestion at ports and lack oftransparency in customs clearance procedu-res. Letters of credit are the most widelyused means of payment. Transfers are usu-ally carried out in a timely manner.

■ Attitude towards foreign investorsThe legal system is based on the 1985constitution, which guarantees the right toprivate property and the right to engage in acommercial activity. There is, however, oneexception to this rule: foreign ownership ofland next to a river, sea or border is forbidden.Expropriation is banned under the constitu-tion, except where it is in the nationalinterest, in which case prior compensation is

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2

payable. The non-discrimination principle(MFN clause) and equal treatment withnationals are enshrined in law. There is noprior approval or registration requirementand formalities for foreigners are broadlysimilar to those for local investors. There areno restrictions on investment, except insectors deemed strategic (eg road freight).The 1998 foreign investment act aims toencourage and facilitate new business start-ups, while strengthening previous legisla-tion. Like other Central American countrieswitnessing a boom in assembly operations(maquila), Guatemala grants tax benefits toforeign investors under Decree 65–89 of theFree Zone Act and Decree 29–89 governingassembly operations. These include exemp-tion from customs duties and VAT for rawmaterials and equipment needed to manufac-ture products intended for export, as well as10-year exemption from corporation tax. Thelegal system offers identical safeguards toforeign and national investors, but opaqueadministrative procedures often place for-eigners at a disadvantage. Guatemala hassigned and ratified the UN convention on therecognition and enforcement of arbitralawards and joined ICSID in 1996. The foreigninvestment act allows international arbitra-tion in disputes arising in connection withinvestments covered by the Overseas PrivateInvestment Corporation (OPIC) and MIGA.The country’s attractiveness has beenboosted by the entry into force, on 1 July2006, of a free-trade agreement with theUnited States and the opening of talks, inOctober 2007, on an association agreement

with the European Union. To promote theestablishment of foreign businesses, the in-vestment promotion and facilitation agency,Invest in Guatemala has been reactivated.Six priority sectors have been identified: callcentres and services outsourcing, tourism,agri-foods, clothing, light industry and for-estry. A plan designed to strengthen thecountry’s competitiveness (Agenda Nacionalde Competividad 2005–2015) has beenlaunched. This initiative’s initial results arepromising. According to the Economic Com-mission for Latin America and the Caribbean(ECLAC), FDI inflows into Guatemalaclimbed from US$208 million in 2005 toUS$325 million in 2006, an increase of66.8 per cent. The country is ranked 75 onthe World Competitiveness League Table,published by the World Economic Forum inSeptember 2006. Moreover, a World Bankreport Doing Business in 2007 – how toreform has rated Guatemala among the top10 reformers of business legislation.

■ Foreign exchange regulationsThere are no restrictions on capital, dividendand currency transfers. Exchange controlswere abolished in 2001. The so-called ‘FreeCurrency Trading’ Act has legalised thecirculation of the US dollar within theeconomy and allows people to open dollar-denominated accounts and make all types ofpayment in that currency. Some banks allowaccounts to be held in euros. There are norestrictions on the transfer of investmentcapital and locally generated profits.

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OPPORTUNITY SCOPE



Mn USDMn USD


USA MexicoElSalvador

Nicaragua CostaRica

MexicoUSA China SouthKorea

ElSalvador

EXPORTS by products■ Coffee, tea, spices 16%■ Sugar 7%■ Oil 6%■ Bananas 5%■ Fuels 9%■ Chemicals 11%■ Manufactured goods 43% ■ Other 3%

■ Foodstuffs 11%■ Chemicals 16%■ Capital goods 25%■ Fuels 20%■ Construction materials 3% ■ Other 25%

IMPORTS by products

0

500

1000

1500

2000

2500

3000

3500

0500

1000150020002500300035004000



Indicators Guatemala Regional averageEmerging

country average


HAITI

203

2

HaitiPopulation (million inhabitants): 8.6GDP (US$ million): 4,961


RISK ASSESSMENTPrudent macroeconomic management, inter-national assistance and a modest agricul-tural-sector recovery should foster somewhatstronger growth in a country vulnerable tonatural disasters. Still-high oil prices will,moreover, continue to stoke inflation, whilethe policy of subsidising energy prices hasbeen weighing on public sector finances.

Government officials have nonethelessmaintained a policy of fiscal and monetarystabilisation under the three-year pro-gramme signed with the IMF late 2006. Theprogramme also includes reforms intendedto increase tax revenues and social spending,privatise the telecommunications and elec-tricity sectors in particular, reduce corrup-tion and improve corporate governance andthe business environment.

The external accounts situation remainsvery shaky with Haiti’s modest exportsvulnerable to exogenous shocks, while itsheavy dependence on imports has exacer-bated the trade deficit, notwithstanding thepreferential terms extended by Venezuela

for oil. Despite the volume of emigrantremittances, the current account deficit willcontinue to grow and, to finance it, Haiti hasto rely on international financial aid on whichit has become very dependent. The poorestLatin American country, Haiti has beendeemed eligible for foreign debt relief, andthe country could reach the completion pointunder the HIPC programme reserved forhighly indebted poor countries by end 2008.

President Rene Preval has received strongsupport from the international community,but with his party, L’Espoir, not having amajority, he has been dependent on a govern-ment coalition. This has complicated mattersin making any progress in resolving theproblems that Haiti continues to face: resto-ration of basic services and infrastructure,severe deterioration of the economic andsocial situation and the resulting climate ofviolence. However, the more assertive roleplayed by Minustah, the United Nationsstabilisation mission, broadened to includedevelopment assistance, has resulted in im-proved security and control over thecountry’ssea and land borders.

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USD millions or % 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 0.4 −2.6 1.8 2.3 3.2 3.7Inflation (period-end rate) 37.8 21.7 14.8 12.4 8.1 7.7Public sector balance (%GDP)(*) −3.6 −3.7 −4.1 −4.4 −6.0 −6.1Exports 330 373 459 494 559 658Imports 1,116 1,183 1,309 1,548 1,837 2,100Trade balance −785 −810 −850 −1,054 −1,278 −1,442Current account balance −180 −159 −214 −380 −646 −817Current account balance (%GDP)(*) −6.1 −4.5 −5.0 −7.6 −10.7 −11.8Foreign debt (%GDP) 47.2 40.0 32.2 30.2 25.3 23.8Debt service (%Exports) 4.5 3.6 3.4 3.3 5.1 3.1Foreign exchange reserves (in months ofimports)

1.3 1.6 1.5 1.9 2.5 2.7


HONDURAS

205

2

HondurasPopulation (million inhabitants): 7.4GDP (US$ million): 9,235


RISK ASSESSMENTGDP growth is expected to slow slightly dueprimarily to the economic slowdown in theUnited States, the country’s main tradingpartner. Household consumption, under-pinned by transfers from expatriates, willnonetheless continue to drive the economywhile inflation, stoked by high prices for foodproducts and imported oil, will ease onlyslightly.

With macroeconomic stability yet to beachieved, economic policywill remainfocusedon the objectives agreed with the IMF undera three-year development programme evenafter its expiry in 2007. Moreover in 2006,the country benefited from cancellation ofpart of its foreign debt under the HIPCprogramme for highly indebted poor coun-tries. The fiscal deficit has been growing,however, due to the inflexibility of publicspending and the approach of the presiden-tial election in 2009. The trade deficit shouldwiden even more. Sales of Arabica coffee andbananas – the main exports – remainexposedto fluctuations in world prices and the textile

production of the maquiladoras assemblyunits have come against intense competition.Imports have moreover far exceeded exportsdue especially to the cost of oil. The volumeof expatriate remittances should, however,somewhat limit a current account deficit ofwhich two-thirds is covered by bilateral ormultilateral aid and the balance by foreigndirect investment, attracted by Honduras’membership since 2006 in the DR-CAFTAfree-trade area between Central Americaand the United States and the prospect ofother agreements of that type.

At mid-term, the administration of Presi-dent Manuel Zelaya of the Liberal Party hasachieved little, lacking a parliamentary ma-jority. With two-thirds of the populationliving below the poverty line, however, im-provement in education and health remainscrucial. Much remains to be done on reducinginsecurity and corruption, as well as moder-nising infrastructure in transport notablywith an interocean route, energy with therestructuring of state-owned company Em-presa Nacional de Energia Electrica (ENEE),and telecommunications.

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Economic growth (%) 3.5 4.7 4.1 6.0 5.8 5.0Inflation (period-end rate) 6.8 9.2 7.7 5.3 7.0 6.5Public sector balance (%GDP) −6.0 −3.4 −2.7 −1.3 −2.8 −2.9Exports 1.4 1.6 1.8 2.0 2.3 2.5Imports 3.0 3.7 4.2 5.0 6.3 7.1Trade balance −1.7 −2.1 −2.4 −3.1 −4.0 −4.5Current account balance (%GDP) −4.0 −5.9 −0.4 −2.0 −4.8 −4.0Foreign debt (%GDP) 81.9 84.9 65.6 46.0 42.9 40.1Debt service (%Exports) 15.3 9.9 10.2 8.0 5.6 5.1Foreign exchange reserves (in months of imports) 4.5 4.9 5.3 5.3 4.6 4.3


JAMAICA

207

2

JamaicaPopulation (million inhabitants): 2.7GDP (US$ million): 10,533

Country @rating: CMedium-term rating: High riskBusiness climate rating: B

RISK ASSESSMENTThe winner in the early legislative electionsof September 2007 was the Jamaica LabourParty, which had been in the opposition for18 years. The new Prime Minister BruceGolding will nonetheless be unlikely to makefundamental changes in economic policy,with the focus remaining on growth and jobs– to reduce poverty and the resulting highlevel of insecurity – and the fight againstcorruption.

In the aftermath of hurricane Dean ofAugust 2007 and its negative impact onfarming, mining and tourism, growth shouldrecover only moderately due to the slowdownin the North American economy, on whichJamaica depends for a quarter of its exports,as well as for tourism and expatriate trans-fers. The economy will be driven mainly byinvestment intended for reconstruction, withinflation remaining high and underminingthe island’s competitiveness.

Also as a result of hurricane Dean, thestructural external account deficit will widena little more. Imports, inflated by purchasesof capital goods and oil (with this essentialitem representing one-quarter of the total),will be likely to far outstrip exports due tothe weak growth of aluminium, bauxite andsugar sales. Compounding those negativetrends, tourism revenues and expatriateremittances are expected to decline. Foreigndirect investment inflows will, moreover,only cover a third of the resulting largeexternal financing needs, with the balancecovered by short-term financing likely to bemore difficult to obtain and more costly in acontext of financial turmoil.

The main fiscal policy objective will mean-while still be to reduce imposing public debtrepresenting about 120 per cent of GDP and40 per cent of which is owed abroad. Servicingthat debt alone absorbs nearly half of publicspending.



Economic growth (%) 2.0 0.4 2.0 2.5 1.5 2.7Inflation (average annual rate) 12.9 13.2 11.4 8.6 7.1 8.0Public sector balance (%GDP)* −9.7 −8.6 −4.8 −5.3 −4.3 −3.5Exports 1.5 1.6 1.8 2.1 2.3 2.4Imports 3.3 3.7 4.5 5.0 5.5 6.0Trade balance −1.8 −2.1 −2.7 −2.9 −3.3 −3.6Current account balance (%GDP) −6.9 −7.2 −11.5 −11.3 −12.7 −13.0Foreign debt (%GDP) 67.0 71.5 63.4 72.1 69.7 69.4Debt service (%Exports) 14.4 17.6 18.0 14.0 17.4 18.5Foreign exchange reserves (in monthsof imports)

3.3 3.8 3.9 3.8 3.4 3.3

*fiscal year ending 31 March, e = estimate, f = forecast

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MexicoPopulation (million inhabitants): 104.2GDP (US$ million): 839,182


STRENGTHS• Mexico has become a manufacturing

power especially by leveraging itsmembership in the North American FreeTrade Agreement (NAFTA).

• The country has enjoyed goodmacroeconomic stability.

• By keeping internal and external deficitsunder control and limiting foreign debt,the country has reassured internationalinvestors.

• The situation in the banking sector hasbeen satisfactory.

• Mexico has benefited from a young andgrowing working population.

WEAKNESSES• Mexico has suffered from the excessive

proportion of its exports flowing to theUnited States and from problems inmeeting competition, particularly fromChina.

• Public finances continue to depend on oilrevenues, the September 2007 tax reformnotwithstanding.

• Political and social obstacles havedelayed progress on essential structuralreforms (energy, telecommunications,education, labour law, justice).

• A lack of investment and skilled labourhas hampered the transition to highervalue-added production.

• There is still extensive social inequalityand poverty, and the businessenvironment could stand improvement.

RISK ASSESSMENTEven with the economy still mainly drivenby domestic demand, growth should remainmoderate in 2008 due notably to the economicslowdown in the United States on whichMexico continues to depend as an outlet forits exports. Inflationary pressures, mainlyattributable to the increase in food andenergy prices, should remain under control,thanks to a tightening of monetary policy.

The international financial turmoil shouldhave limited impact on a relatively diversi-fied economy with reasonably solid founda-tions. Public finances should continue toimprove, even if they remain dependent onoil revenues, with already moderate externaldebt ratios easing further. Amid a decline in

oil production, less dynamic exports to theUnited States and a slowdown of emigrantworker remittances, the external accountdeficit will widen. Foreign direct investmentshould nonetheless cover half of Mexico’sfinancing needs, with short-term debt re-maining moderate.

Stronger growth – especially desirable inview of demographic growth – would none-theless require increased investment andmodernisation of the entire economy. State-run energy companies have performedpoorly. The level of skills in the labour forcewill have to rise in order to move productionupmarket. Reforms have come up againststiff social and political resistance, however,with President Calderon’s National Action

MEXICO

209

2

Party (PAN) conservative party lacking aparliamentary majority. The adoption ofpartial pension and tax reforms at thepresident’s initiative in 2007 was nonethe-less an encouraging step forward.

In that context, the Coface payment expe-rience has remained satisfactory. Sectors

linked to construction, retailing and, to alesser degree, the car industry have been themost dynamic. The few rough patches en-countered in the dairy industry and textilesare the result of particular problems ordifficulties experienced in meeting foreigncompetition.



Economic growth (%) 1.4 4.2 3.0 4.8 2.8 2.9Inflation (average annual rate) 4.5 4.7 4.0 3.6 3.8 4.0Public sector balance (%GDP) −3.2 −2.0 −1.4 −1.3 −1.2 −1.0Exports 164.8 188.0 214.2 250.0 260.3 275.0Imports 170.5 196.8 221.8 256.1 274.4 295.4Trade balance −5.8 −8.8 −7.6 −6.1 −14.1 −20.4Current account balance −8.8 −6.7 −4.9 −1.9 −11.3 −19.1Current account balance (%GDP) −1.4 −1.0 −0.6 −0.2 −1.3 −2.0Foreign debt (%GDP) 25.6 24.3 22.6 20.1 19.2 18.5Debt service (%Exports) 16.6 18.9 12.0 9.0 8.7 7.3Foreign exchange reserves (in monthsof imports)

3.5 3.3 3.4 3.1 2.9 2.8



■ Means of entrySince the entry into force of the NAFTAagreement, Mexico offers incentives to for-eign companies looking to gain a strategicfoothold on the American continent. Theseinclude gradual elimination of tariff barriers,industrial property protection and free move-ment of capital. Mexico is tied through free-trade agreements with 44 countries. Themost recent, signed with Japan in September2004, makes Mexico the only country in theworld to have free-trade agreements withthe EU, the United States and Japan. Thefree-trade agreement with the EU, in forcesince 1 July 2000, makes it easier for EUcountries to win back market share and stepup investment, both of which have declinedunder the impact of NAFTA and competitionfrom Asian products. Tariffs on industrialgoods were dismantled on 1 January 2007.Government-licensed independent inspec-tion companies are responsible for checkingproduct compliance with Mexican OfficialStandards (NOM) and issuing certificates of

conformity. The services of these companiesare widely used but fairly expensive. Themost common invoicing currency is the USdollar. Settlements are made within 30–45 days, which is fairly quick considering thehigh rates of interest and shortage of credit.Documentary credit is the safest means ofpayment for export firms but remains expen-sive for the Mexican buyer.

■ Attitude towards foreign investorsThe economy today is wide open to foreign in-vestment, although a number of strategicsec-tors are closed and remain the preserve ofMexican companies. Foreigners may investin these sectors only through a ‘neutral in-vestment’ scheme, ie without decision-mak-ing powers. Foreign investment in opensectors above a certain threshold (currently€140 million) is subject to the approval of theNational Commission on Foreign Invest-ment. Below this threshold, foreigners mayacquire 100% of a Mexican firm without seek-ing the Commission’s approval. Since 1999,there is no capital ceiling on foreign invest-ment in commercial and merchant banks.

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250

300

350

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June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

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9

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9

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1

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1

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4

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6

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7

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7

WORLDMexico

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OPPORTUNITY SCOPE



Mn USDMn USD


USA SpainCanada Germany Japan JapanUSA China GermanySouthKorea

EXPORTS by products■ Vehicles and machinery 29%■ Electrical equipment 25%■ Oil 15%■ Other manufactured goods 4%■ Agricultural raw materials 3% ■ Other 24%

■ Vehicles and machinery 25%■ Electrical equipment 22%■ Chemicals 11%■ Plastics 6%■ Foodstuffs 6%■ Fuels 6% ■ Other manufactured goods 18%■ Other 6%

IMPORTS by products

0

30000

60000

90000

120000

150000

0

50000

100000

150000

200000



Indicators Mexico Regional averageEmerging

country average


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NicaraguaPopulation (million inhabitants): 5.2GDP (US$ million): 5,369


RISK ASSESSMENTGDP growth should be slightly higher in2008 spurred by resilient domestic demandand a modest contribution by foreign trade,while the conclusion of a new three-yearagreement with the IMF late 2007 shouldfacilitate restoring a semblance of confidenceamong investors and bilateral and multilat-eral lenders. High prices, particularly for oil,will meanwhile continue to stoke inflation.

With his left-wing Sandinista Front Partylacking a majority in parliament, PresidentDaniel Ortega, in office since January 2007,has been led to adopt a pragmatic approachessentially maintaining his predecessor’sprudent economic policy. This orientationhas been reinforced with the new IMFagreement focused on restructuring the elec-tricity sector, going forward with the reformsof public finances and social security, andimproving the business environment.

Membership in the DR-CAFTA, CentralAmerican free-trade agreement with theUnited States since April 2006, has spurredexports of both farm products – coffee andsugar – and manufactured products, partic-

ularly textiles from maquiladora assemblyunits in customs-free zones, and enhancedNicaragua’s attractiveness to North Ameri-can investors. The country’s excessive de-pendency on imports, especially capitalgoodsand oil, has resulted in a structural tradedeficit. With the slowdown of expatriateremittances and despite official donations,the current account deficit will thus reach avery high level. The country depends onconcessional loans to cover most of its exter-nal financing needs, with foreign directinvestment covering under a third of thetotal. Foreign debt and the debt service havenonetheless sharply declined, thanks to reliefgranted under the HIPC and MDRI pro-grammes, while public debt eased to 60 percent of GDP in 2007 and the financial systemwas strengthened.

Nicaragua has nonetheless remained thepoorest Latin American country, behindHaiti, with its exposure to natural disastersconstituting an additional element of vulner-ability. In this context, the crucial sectors forthe country’s development include energy,water treatment, port infrastructure, agri-culture, assembly industries and tourism.

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Economic growth (%) 2.3 5.1 3.1 3.7 2.9 3.0Inflation (period-end rate) 6.5 9.3 9.6 9.5 10.0 8.5Public sector balance (%GDP)* −7.7 −6.5 −5.1 −4.2 −5.8 −6.4Exports 1.1 1.4 1.7 2.0 2.2 2.5Imports 2.0 2.5 3.0 3.4 3.7 4.2Trade balance −1.0 −1.1 −1.3 −1.4 −1.6 −1.7Current account balance (%GDP) −18.1 −12.6 −14.9 −15.8 −15.8 −16.3Foreign debt (%GDP) 166.7 115.3 110.3 86.0 55.0 52.5Debt service (%Exports) 18.5 14.6 3.6 4.1 4.2 4.2Foreign exchange reserves (in months ofimports)

2.3 2.7 2.5 2.8 2.6 2.7


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PanamaPopulation (million inhabitants): 3.3GDP (US$ million): 17,097


RISK ASSESSMENTPresent and future economic expansion isespecially linked to the many benefits ex-pected from the broadening of the PanamaCanal, with China now the waterway’s sec-ond largest user after the United States. Thework began mid-2007 and will last eightyears, at a cost estimated at over 5 billiondollars. Growth will remain high in 2008, notonly because of that large project but alsothanks to household consumption and publicspending, as well as private investment inthe financial sector and building construc-tion.

While dollarisation of the economy hascontributed to macroeconomic stability, pru-dent management of public finances willremain necessary to keep the fiscal deficitunder control and limit the foreseeable in-crease in public debt linked to the Canalenlargement work. Government officialshave nonetheless been managing the foreigndebt proactively to improve its profile andreduce the still-high ratio to GDP. Thecapitalgoods purchases necessitated by the ongoingwork on the Canal will exacerbate a struc-

tural external account deficit, already af-fected by oil imports and by profitrepatriation by foreign companies. Plannedratification of a free-trade agreement withthe United States, Panama’s number onetrading partner, has raised hopes for futuredevelopment of exports. In any case, financ-ing needs will be entirely covered by theinflux of foreign direct investment attractedby a relatively good business environment.Recent mergers and acquisitions by foreignbanks targeting local banking institutionshave, moreover, strengthened the bankingsector.

The government headed by President Mar-tin Torrijos has kept a parliamentary major-ity, which should be conducive toimplementation of measures to reduce thepoverty afflicting 40 per cent of the popula-tion. Progress on reforms to improve thelegal system and combat corruption will alsobe essential. Panama’s attractiveness is alsolinked to completion of other major projects,notably a gas pipeline from Colombia and anoil refinery (with the participation of QatarPetroleum), intended to secure the energysupply.

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Economic growth (%) 4.2 7.5 6.9 8.7 9.0 8.8Inflation (average annual rate) 0.5 0.2 3.2 2.5 5.4 4.6Public sector balance (%GDP) -4.8 -4.9 -3.2 0.5 -0.5 -0.4Exports* 0.8 0.9 1.0 1.0 1.1 1.2Imports* 2.9 3.3 3.8 4.4 5.3 6.5Trade balance -2.1 -2.4 -2.8 -3.3 -4.2 -5.4Current account balance (%GDP) -4.5 -7.5 -5.0 -2.2 -5.5 -8.0Foreign debt (%GDP) 63.7 63.4 60.6 57.3 52.6 48.5Debt service (%Exports) 16.9 15.0 17.9 7.2 9.6 11.7Foreign exchange reserves(in months of imports)

2.2 1.2 2.0 2.1 2.4 2.4

*ex Colon customs free area, e = estimate, f = forecast

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ParaguayPopulation (million inhabitants): 6.0GDP (US$ million): 9,110


STRENGTHS• Paraguay boasts extensive

hydroelectricity resources and richagricultural potential.

• The country enjoys the backing ofinternational financial institutions.

• Public and external debt ratios haveimproved considerably.

• The democratic system has beenconsolidated for some years.

WEAKNESSES• The country has suffered from its

landlocked position – which has alsomade it a transit hub for illicit drugs –and from the size of the informal economy.

• The economy remains very vulnerable tovarious shocks: changes in the weather,fluctuations in world prices foragricultural and oil products, economictrends in Argentina and Brazil.

• The restructuring of a bloated andinefficient public sector has been lagging,and the banking sector is still very weak.

• Weak institutions, governance problems,extensive corruption and the slow pace ofstructural reforms have undermined thebusiness environment.

• The degree of inequality, poverty andinsecurity is still high.

RISK ASSESSMENTThe economic growth should slow, albeitstill underpinned by modest household con-sumption growth, benefiting from expatri-ate remittances, by increased publicspending in the run-up to general electionsin April this year and by investment in tel-ecommunications and biofuels. High agri-cultural and oil prices, compounded byexpansionary fiscal policy, will stoke infla-tionary pressures.

Exports should increase amid relativelyfirm foreign demand and high soybean,cotton and meat prices. They will grow less,however, than oil and capital goods importsneeded for investments. The trade deficit willnonetheless level off. The extent of hydroe-lectricity sales and expatriate transfersshould, moreover, facilitate keeping the cur-rent account near equilibrium.

The presidential election in April this yearshould result in a duel between the favourite,

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the former Bishop Fernando Lugo (from theleft-wing Patriotic Alliance for Change andformer Commander in Chief Lino Oviedo(Citizens Union for Ethics), thus bringing toa close 60 years of dominationby theColoradoParty. Whoever wins, the prudent economicpolicy pursued under the agreed IMF pro-gramme that will expire in August this year,should not be in jeopardy. With the likely

absence of a parliamentary majority, how-ever, progress on structural reforms shouldcontinue to be as laborious as it has been inthe past. The country will be unable toconsolidate its macroeconomic situation,however, without a complete restructuringof state-owned companies and the bankingsector, especially state-owned banks, whosefinancial situation has been precarious.



Economic growth (%) 3.8 4.1 2.9 4.3 4.5 3.9Inflation (period end rate) 9.3 2.8 9.9 12.5 8.8 7.8Public sector balance (%GDP) 0.0 1.8 0.9 0.4 -0.1 -0.5Exports 2.2 2.9 3.3 4.8 6.7 7.5Imports 2.4 3.1 3.8 5.8 7.5 8.4Trade balance -0.3 -0.2 -0.5 -1.0 -0.9 -0.9Current account balance 0.1 0.1 0.0 -0.2 0.05 0.04Current account balance (%GDP) 2.1 2.0 0.1 -2.1 -0.5 -0.4Foreign debt (%GDP) 57.7 49.4 44.7 37.2 35.1 36.6Debt service (%Exports) 15.9 12.2 11.3 8.7 6.4 5.7Foreign exchange reserves (in months of imports) 4.6 4.2 3.8 3.8 3.5 3.4



■ Market overviewAccording to official figures, Paraguay is oneof the poorest countries in Latin America,characterised by a high incidence of informaleconomic activity. Exogenous factors remainthe main drivers of the economy. Paraguayis enjoying a boom in farm exports and sellselectricity produced by the large two-nationhydropower stations on the borders withArgentina and Brazil. Imports are only par-tially intended to satisfy domestic demand.The bulk of imported goods, increasinglyfrom China, are re-exported either officiallyor smuggled into neighbouring countries, inparticular Brazil.

■ Means of entryParaguay is a member of Mercosur, whosefounding treaty enshrines the principle offree movement of goods within the area.Mercosur comprises its four founding mem-bers: Brazil, Argentina, Uruguay and Para-guay. Venezuela was included in November

2005, but its membership has not yet beenratified by all the parliaments (Brazil andParaguay have still to decide).

The common external tariff ranges from 0to 35 per cent (average 13 per cent). Intra-Mercosur trade is duty-exempt for 90 percent of products specified on the unweightedlist. The general treaty provides for sizeablespecial regimes (cars, IT, telecommunica-tions, sensitive products) and exceptionalregimes (special customs areas sited in Braziland Argentina). The basic rate of VAT is 10per cent and the minimum rate 5 per cent.

Fifteen years after the establishment ofMercosur, Paraguay believes that, except fortariff reductions, it has not seen any improve-ment in the free movement of goods for the‘small countries’ on account of multiple non-tariff barriers, lack of harmonisation oftechnical standards and health and planthealth requirements.

■ Attitude towards foreign investorsForeign investment legislation is fairly lib-eral. In general, there are restrictions on

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foreign and private investment in govern-ment monopoly sectors such as fixed teleph-ony, drinking water supply and purification,electricity, cement manufacture and crudeoil imports. The country allows recourse tointernational arbitration for the settlementof disputes between foreign investors and theState.

Paraguay is legally unstable. Foreign di-rect investment inflows into the country areunsteady due to poor governance and lack oflegal security.

■ Foreign exchange regulationsThere are no exchange controls. The mostwidely used currency is the US dollar.

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2

OPPORTUNITY SCOPE



Mn USDMn USD


Uruguay RussiaBrazil Argentina Chile BrazilChina Argentina USAJapan

EXPORTS by products■ Oil, seeds and oleaginous fruits 32%■ Meat 22%■ Cereals 11%■ Foodstuffs 7%■ Other 28%

■ Agricultural raw materials 8%■ Fuels 15%■ Chemicals 15%■ Machinery and transport equipment 36%■ Other manufactured goods 24%■ Other 2%

IMPORTS by products

0

100

200

300

400

500

0

300

600

900

1200

1500



Indicators Paraguay Regional averageEmerging

country average


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PeruPopulation (million inhabitants): 28.4GDP (US$ million): 93,269


STRENGTHS• Endowed with abundant mineral wealth

(copper, gold and zinc), Peru hasbenefited from the high raw materialprices.

• It also boasts substantial energy,agricultural and fishing resources andexceptional cultural heritage.

• Peru has pursued prudent fiscal andmonetary policies.

• Foreign debt ratios have been improving,thanks to sound public financemanagement and to the growth of bothGDP and exports.

• Foreign exchange reserves are currentlyat comfortable levels.

WEAKNESSES• Peru continues to be vulnerable to

exogenous shocks, such as world rawmaterial price downturns, adverseweather conditions.

• Dualism continues to mark the economywith an ethnic cleavage echoing thesharp contrast between a relativelymodern sector in the coastal plains andmining areas and an inland subsistencesector.

• The poverty afflicting more than half thepopulation has been a source of politicaland social instability, epitomised by therise of indigenist populism in the Andeanregions.

• The banking system’s extensivedollarisation could jeopardise its stabilityin case of a crisis of confidence.

RISK ASSESSMENTPeru’s economic growth should remainamong Latin America’s highest in 2008,despite a slight slowdown due to moremoderate external demand growth. Peru hasthus been enjoying its longest period ofeconomic expansion in the past 30 years. Theinternational financial turmoil should havelimited impact, with growth resting on rela-tively solid foundations and domestic de-mand constituting the main economic driver.

President Alan Garcia’s administration,engaged in a reform programme in liaisonwith the IMF, has to pursue prudent fiscalpolicy with public debt ratios continuing toimprove sharply. Peru’s external situationhas also improved, with debt ratiosapproach-ing those of the best regional risks. The newearly repayment to the Paris Club end 2007,after the one made in 2005, has contributedto reducing the foreign debt burden andkeeping the corresponding debt service at

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moderate levels. Good raw material exportperformance and a free-trade agreementcoming into force with the United Statesaugur well for a continued slight externalaccount surplus, with foreign direct invest-ment expected to completely cover the coun-try’s financing needs. Moreover, thecomfortable level of foreign exchange re-serves will substantially mitigate liquiditycrisis risk.

The proportion of public and foreign debtdenominated in foreign currencies and theextent of banking system’s dollarisationhavenonetheless remained high. The economycontinues, moreover, to be excessively de-

pendent on world raw material prices, whichhas impeded its diversification, and infra-structure shortcomings have hamperedPeru’s development. The pace ofdevelopmenthas also suffered from the extensive povertyand inequality, heightening social and polit-ical tensions and from the difficult businessenvironment.

The Coface corporate payment experiencehas been relatively satisfactory, with themineral and gas sectors the most dynamicalong with the construction sector in thewake of the August 2007 earthquake, unlikethe textiles and clothing industry affected byforeign competition and the local currencyappreciation.



Economic growth (%) 3.8 5.2 6.7 7.6 8.0 7.0Inflation (average annual rate) [Query: “averageannual rate” inserted as per the source file.Please check.]

2.5 3.5 1.5 1.1 2.1 2.0

Public sector balance (%GDP) −1.7 −1.0 −0.3 2.1 0.0 -0.5Exports 9.1 12.8 17.3 23.8 26.2 27.8Imports 8.3 9.8 12.1 14.9 18.2 21.9Trade balance 0.8 3.0 5.3 8.9 8.0 5.9Current account balance −0.9 0.0 1.1 2.5 1.7 0.5Current account balance (%GDP) −1.5 0.0 1.4 2.6 1.6 0.5Foreign debt (%GDP) 48.5 44.8 36.1 30.3 26.4 24.5Debt service (%Exports) 26.4 22.2 30.1 12.4 13.1 14.2Foreign exchange reserves (in months of imports) 8.8 8.8 8.1 7.7 8.4 8.0



■ Market overviewThe Camisea gas field, which supplies natu-ral gas to Lima and to a condensate process-ing plant in Pisco, will fuel a gas liquefactionplant to the South of Lima in 2010–2011, aswell as a petrochemicals complex in the southof the country, a feasibility study of which isunder way. The country’s mining sector isamong the world’s five largest producers ofcopper, zinc, silver, gold and molybdenum.Construction is booming on the back of a vastprogramme of social housing and investmentfrom Peruvian expatriates. The constructionsector’s medium-term prospects will be fur-

ther boosted by the award of road-buildingconcessions. Textiles, clothing, farmproductsand foodstuffs benefit from the generalisedsystem of preferences (Andean Trade Pro-motion and Drug Eradication Act, ATPDEA)granted by the United States to four Andeancountries. This arrangement will be madepermanent under a free-trade agreementwith the United States. While the transfor-mation of fishery products is being encour-aged, fish meal remains the sector’s leadingexport. The generalised scheme of prefer-ences (GSP+), in force until 2015 with theEuropean Union, is still under-utilised. Itprovides for access to the European marketof 7,200 products at zero-rated duty. In due

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course, it will be replaced by an EU/ACNassociation agreement whose trade compo-nent is the subject of recently started talks.

■ Means of entryFarm, crop and animal products requirehealth certificates which comply with thestandards laid down by the Andean Com-munity of Nations and agreed by Peru. TheNational agencies, Senasa and Digesa, areresponsible for administering all health stan-dards relating to imports. Most internationalmeans of payment are widely used. Thereare four rates of customs duty: 0, 5,10 and 20per cent. The average applied rate is 7.97 percent.

■ Attitude towards foreign investorsPeru’s legislation offers foreign investors anumber of safeguards, including equal rightswith domestic investors, the option of signinglegal stability agreements, unrestrictedtransfer of profits, dividends and capital,freedom of enterprise, freedom to import and

export, etc. Foreign investment is not subjectto approval. Investors seeking the benefit oflegal stability agreements must first registerwith the Peruvian investment promotionagency, Proinversion, although there is notime limit for doing so. Peru has signed thefounding charter of MIGA, as well as theoriginal act of the International Centre forSettlement of Investment Disputes (ICSID).It has also ratified the New York Conventionon the Recognition and Enforcement of Ar-bitral Awards. It has dual taxation agree-ments with three countries (Sweden, Canadaand Chile) and has signed a draft agreementwith France which could come into force in2008 after ratification by the Peruvian par-liament. There is no difficulty in obtaining awork or residence permit in connection withan investment.

■ Foreign exchange regulationsPeru has a floating, but managed, exchangerate in what is still a highly dollarisedeconomy.


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400

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June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

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0

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0

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1

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1

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2

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3

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4

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5

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6

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6

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7

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7

WORLDPeru

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OPPORTUNITY SCOPE



Mn USDMn USD


USA CanadaChina Chile Japan BrazilUSA Ecuador ChileChina

EXPORTS by products■ Copper 25%■ Gold 17%■ Zinc 8%■ Fuels 8%■ Fishing products 6%■ Foodstuffs 5%■ Other 31%

■ Foodstuffs 11%■ Fuels 20%■ Chemicals 16%■ Machinery and transport equipment 28%■ Other manufactured goods 22%■ Other 3%

IMPORTS by products

0

1000

2000

3000

4000

5000

6000

0

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1000

1500

2000

2500

3000



Indicators Peru Regional averageEmerging

country average


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United StatesPopulation (million inhabitants): 300GDP (US$ million): 13,201,819


STRENGTHS• A huge market that attract investors and

companies.• The Federal Reserve Bank’s monetary

policy takes growth and employment intoaccount, as well as inflation.

• The reactivity and flexibilitydemonstrated by companies rests on alabour force with high sectoral andgeographic mobility and on the flexibilityof labour legislation.

• The quality of higher education anduniversities and the size of the newtechnologies sector have kept R&D at ahigh level and fostered innovation.

WEAKNESSES• The low domestic savings rate has been a

major causal factor of the continuingcurrent account deficit.

• The economy is highly dependent onstock market prices and interest rates.

• The decline of traditional manufacturinghas also contributed to the currentaccount deficit.

• With the country’s very large energyneeds major investments will beessential in adjusting to environmentalconstraints.

• Demographic pressures have brought tolight the shortcomings of the health andpension financing systems.

RISK ASSESSMENTThe growth slowdown was less severe thanexpected in 2007 with the effects of theresidential construction downturn thus faronly partially spreading to household con-sumption and other economic sectors. Verygood export performance limited the ampli-tude of the slowdown.

The growth slowdown will be more severein 2008 although still mitigated by the strongexport performance. The adjustment processwill continue in residential construction atleast until the third quarter. Households,already carrying heavy debt representing135 per cent of their disposable income willbe subject to a reverse wealth effect associ-ated with the depreciation of their propertywealth and will have to contend with stifferconditions for refinancing their mortgage

loans with their default rate continuing totrend up in consequence. A tighter jobmarketand rising unemployment will tend moreoverto erode their confidence with the effects ofthose unfavourable trends amplified byslower growth of their disposable income andhigh petrol prices at the pump. They willsignificantly reduce their consumption – 70per cent of GDP – with many crucialeconomicsectors affected in consequence. Corporateinvestment will be generally less dynamicagain this year. That will particularly con-cern investment in structures that will haveto be postponed in the absence of conditionsfor access to credit. Buoyed, however, by arelatively low rate of indebtedness (43 percent of GDP) and ample cash flow (88 percent), companies will continue their equip-ment purchases despite erosion of their rate

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2

of profit (9.3 per cent of GDP). Exports (12per cent of GDP) will continue theiroutstand-ing performance, thereby offsetting theweakness of domestic demand. Companieswill continue to capitalise on both favourableexchange rates and the still-buoyant dy-namic in emerging regions, particularlyChina and the Middle East. Imports, mean-while, will decelerate, and the federal budgetdeficit should widen further.

Corporate payment behaviour has re-mained generally good at this juncture withsolvency very satisfactory, a situation re-

flected by a Coface payment incident indexcurrently near the world average. That hasparticularly been the case for very export-oriented companies, which have been enjoy-ing two-digit profit growth. Companiesfocusing on the domestic market have beenin more dire straits with some sectorsalreadyfaced with tense financial situations that acredit crunch will only exacerbate: residen-tial construction, the car industry, home-related retailing and services to privateindividuals, along with the textile-clothingand hifi-TV-video sectors.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 2.5 3.6 3.1 2.9 2.1 1.7Consumption (var.) 2.8 3.6 3.2 3.1 2.9 1.3Investment (var.) 1.0 5.8 7.1 6.6 4.7 3.2Inflation 2.3 2.7 3.4 3.2 2.7 2.5Unemployment 6.0 5.5 5.5 4.6 4.6 5.2Short-term interest rate 1.2 1.6 3.5 5.2 4.5 4.2Public sector balance (%GDP) -3.5 -3.6 -2.6 -1.9 -1.2 -1.4Public sector debt (%GDP) 62.8 62.3 62.6 62.1 60.2 61.6Exports (var.) 1.3 9.7 6.9 8.4 7.4 8.5Imports (var.) 4.1 11.3 5.9 5.9 2.5 1.8Current account balance (%GDP) -4.8 -5.9 -6.4 -6.1 -5.4 -4.8



■ ConstructionIn the first nine months of 2007, new housingstarts declined 21 per cent. The marketdownturn affected three of the largest build-ers: Pulte Homes, Centex Homes and RylandHomes have been underperforming, andNeumann Homes has announced its inten-tion to seek Chapter 11 bankruptcy protec-tion. The deterioration should continue in2008, in a context of slowing domestic de-mand.

■ RetailThe consumption slowdown this year shouldaffect the sector to varying degrees. High-end department stores will be relativelyunaffected. Conversely, those targeting mid-dle- or low-income clientele will fare lesswell. Wal-Mart should continue to underper-

form and Gap will struggle to turn the corner,the other clothing sector chains will hold uprelatively well. Chains specialised in thehome and leisure area will suffer, and moreso than supermarket food retailing. The goodperformance of neighbourhood shops anddrugstores should continue.

■ Automotive industryPassenger car sales will sag in 2008 and themarket share of the Big Three should con-tinue to erode. The competitive advantagesmade possible by the agreements concluded,with the United Auto Workers should onlybegin to make a difference in 2010. Thecompetition, particularly from Asian car-makers, will thus remain intense in comingmonths while the Americans continue reor-ganising and restructuring,perfectinghybridcars and adapting them to regulatory limits

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on CO2 emissions at a total estimated cost ofUS$100 billion, or US$1,400 per vehicle.

■ SteelActivity was buoyant in 2007, driven bystrong demand from emerging regions andhigh metal prices. It should weaken thisyear, however, affected by the growing slug-gishness of the automotive industry andresidential construction. The good perform-ance of public infrastructure investmentshould, however, allow the sector to achieve4 per cent growth. Domestic production willpartly substitute for imports confrontedwith both unfavourable exchange rates andprotective measures against Chinese prod-ucts. The American market will, nonethelesscontinue to attract foreign investors by virtueof its size and the local presence of rawmaterials.

■ PaperWhile benefiting exports the weak dollar hasincreased the supply cost to American man-ufacturers of wood pulp – dominated by theCanadians and Scandinavians. Producers ofpulp or even of paper for hygienic,housekeep-ing or technical purposes, less sensitive toeconomic downturns should remain moreprofitable than producers of newsprint orprinting and writing paper. Paper and card-board processors – like manufacturers ofpaper and packaging articles – subject todirect pressure from mass distribution willpresent a higher level of risk.

■ Chemicals and plasticsThe profitability of sector companies al-though affected by the downturn of propertyinvestment and the reform of the car marketwill remain satisfactory, thanks to risingsales prices and the shutdown of certainfacilities. Local players will moreover benefitfrom the favourable impact of the dollar’sdecline on exports and from slower priceincreases for gas (the sector’s primary sourceof raw material) than for oil.


■ PaymentExporters should pay close attention to salescontract clauses on the respective obligations

of the parties and determine payment termsbest suited to the context, particularly wherecredit payment obligations are involved. Inthat regard, cheques and bills of exchangeare very basic payment devices that do notallow creditors to bring actions for recoveryin respect of ‘exchange law’ (droit cambiaire)as is possible in other signatory countries ofthe 1930 and 1931 Geneva Conventions onuniform legal treatment of bills of exchangeand cheques.

Cheques are widely used but, as they arenot required to be covered at their issue, offerrelatively limited guarantees. Account hold-ers may stop payment on a cheque bysubmitting a written request to the bankwithin 14 days of the cheque’s issue. Moreo-ver, in the event of default, payees must stillprovide proof of claim. ‘Certified checks’ offergreater security to suppliers since the bankcertifying the cheque thereby confirms thepresence of sufficient funds in the accountand makes a commitment to pay it. Althoughmore difficult to obtain and thus less com-monplace, ‘cashiers checks’ cheques drawndirectly on a bank’s own account providecomplete security as they constitute a directundertaking to pay from the bank.

Bills of exchange and promissory notes areless commonly used and offer no specificproofof debt. The open account system is onlyjustified after a continuing business relation-ship has been established. Tranfers are usedfrequently especially via the SWIFT elec-tronic network – operated by the Society forWorldwide Interbank Financial Telecom-munication – to which most American banksare connected and which provides speedyand low-cost processing of international pay-ments.

SWIFT transfers are particularly suitablewhere trust exists between the contractingparties since the seller is dependent on thebuyer acting in good faith and effectivelyinitiating the transfer order. For largeamounts, major American companies alsouse two other highly automated interbanktransfer systems – the Clearing House Inter-bank Payments System (CHIPS), operatedby private financial institutions, and theFedwire Funds Service System, operated bythe Federal Reserve.

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2

■ Debt collectionSince the American legal system is complexand, especially as regards lawyers’ fees,costly, it is advisable to negotiate and settleout of court withcustomerswhereverpossibleor else to hire a collection agency. The partiescan also resort to arbitration or AlternativeDispute Resolution (ADR), a relatively infor-mal mediation system, which makes it pos-sible to avoid costly and lengthy ordinarycourt procedures.

The judicial system comprises two basictypes of court: the federal district courts withat least one such court in each state and thecircuit or county courts under the jurisdictionof each state. The Federal Rules of CivilProcedure promulgated by the SupremeCourt and regularly amended govern thevarious phases of civil procedure at thefederal level while each state has its ownrules of civil procedure. The vast majority ofproceedings are heard by state courts, whichapply state and federal law to disputes fallingwithin their jurisdictions (ie legal actionsconcerning persons domiciled or resident inthe state).

Federal courts, on the other hand, rule ondisputes involving state governments, casesinvolving interpretations of the constitutionor federal treaties and claims aboveUS$75,000 between citizens of differentAmerican states or between an Americancitizen and a foreign national or foreign statebody or, in some cases, between plaintiffsand defendants from foreign countries.

A key feature of the American judicialsystem is the pre-trial ‘discovery’ phasewhereby each party, before the main hearing,may demand evidence and testimonies relat-ing to the dispute from the adversary beforethe court hears the case. During the trialitself, judges give plaintiffs and their lawyersconsiderable leeway to produce pertinentdocuments at any time and conduct the trialin general (adversarial procedure).

The ’discovery phase’ can last severalmonths, even years, and entail high costsdue to each adversary’s insistence on con-stantly providing pertinent evidence (arguedby each party) and involve various means –like examinations, requests to provide sup-porting documents, the testimony of wit-nesses and reports by detectives – beforesubmitting them for court approval duringthe final phase of the proceedings.

Another feature of the American proce-dural system is that litigants may request acivil or criminal case to be heard by a jury(usually made up of 12 ordinary citizens notfamiliar with legal aspects – ‘twelve goodmen and true’ according to the populardefinition of ’jury’) whose task is to deliver averdict based overall on the facts of the caseand the evidence produced during the pro-ceedings.

In civil cases, the jury determines whetherthe demand is justified and also determinesthe penalty to impose on the offender. Incriminal cases, the jury decides on thedefendant’s guilt but the judge decides thepunishment.

For especially complex, lengthy or expen-sive litigation, as in the case of insolvencyactions, courts have been known to allowcreditors to hold the professionals (eg audi-tors) counselling the defaulting party liable,where such advisors have demonstrablyacted improperly.


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WORLDUnited States

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UruguayPopulation (million inhabitants): 3.3GDP (US$ million): 19,308


STRENGTHS• Endowed with abundant agricultural,

forestry and livestock-breedingresources, Uruguay has leveragedmembership in Mercosur.

• There has been notable improvement inthe macroeconomic situation, whichmoreover enabled the country to fullyrepay the IMF ahead of schedule late2006.

• Government officials have taken pains tocombine progress on reforms concerninghealth, education, the public sector andlabour relations with tangible socialprogress.

• The country’s assets include a stabledemocratic system, relatively good socialindicators and an improved businessenvironment.

WEAKNESSES• Uruguay’s domestic market is small and

its exports, predominantly agricultural,lack diversification.

• Inadequate savings and investment rateshave undercut the country’s growthpotential.

• Public and external debt has remainedlarge despite improvement in itsstructure.

• The banking system continues to bevulnerable due mainly to extensivedollarisation.

RISK ASSESSMENTGDP growth should remain relatively robustin 2008, driven by household consumption ina context of rising wages and by investmentin agriculture, transport and industry, espe-cially with construction of a second cellulosefactory. High oil and food prices compoundedby firm domestic demand have, however,generated inflationary pressures likely toprompt adoption of more restrictive mone-tary policy and a tightening of credit.

Exports will continue to benefit from de-mand for farm and meat products fromUruguay’s main trading partners, the UnitedStates, Brazil and Argentina, as well as fromthe launch of cellulose and paper sales.Imports will also grow with the countryremaining heavily dependent on oil pur-chases (representing almost one quarter oftotal imports) and the cellulose factory con-tinuing to need purchases of capital goodsabroad. Overall, a moderate external account

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deficit is expected with Uruguay’s financingneeds covered by foreign direct investment.

Although no longer tied to an IMF pro-gramme, the left coalition government led byPresident T. Vazquez has pursued prudenteconomic policy, notably focused on main-taining a balanced budget. The objective isto ease the burden of both public debt,denominated mainly in US dollars and rep-resenting about 60 per cent of GDP, andforeign debt, whose maturity has, however,been extended. Although the banking systemhas improved its performance, meanwhile, itnonetheless remains exposed to possible

repercussions of international financial tur-moil and to a bloated public sector.

Reforms are moreover pending in severalareas: the civil service, public sector, bank-ruptcy law and labour relations, intended tomake the economy more competitive. Gov-ernment officials have sought to combinethose reforms with the emphasis on socialspending, and implemented a new healthsystem early 2008. Differences between thegovernment coalition’s pragmaticandradicalwings could, however, delay the changeprocess.



Economic growth (%) 2.2 11.8 6.6 7.0 7.2 5.0Inflation (period end rate) 10.2 7.6 4.9 6.4 8.1 6.8Public sector balance (%GDP) -3.2 -2.2 -0.7 -0.6 -0.1 0.0Exports 2.3 3.1 3.8 4.4 5.2 5.9Imports 2.1 3.0 3.8 4.9 5.4 6.0Trade balance 0.2 0.2 0.0 -0.5 -0.2 -0.1Current account balance -0.1 0.0 0.0 -0.4 -0.1 -0.2Current account balance (%GDP) -0.5 0.3 0.0 -2.3 -0.5 -0.6Foreign debt (%GDP) 118.3 96.7 75.3 66.3 61.6 55.2Debt service (%Exports) 52.6 41.1 52.1 44.2 16.6 15.1Foreign exchange reserves (in months ofimports)

7.2 6.4 7.2 5.3 5.7 5.8



■ Market overviewEconomic activity is essentially driven byexternal factors, on the back of strong globaldemand for foodstuffs exported by Uruguay.Growth has benefited all sectors of theeconomy, with the exception of financialservices.

■ Means of entryUruguay is a member of Mercosur, whosefounding treaty enshrines the principle offree movement of goods within the area.Mercosur comprises its four founding mem-bers: Brazil, Argentina, Uruguay and Para-guay. Venezuela was included in November2005, but its membership has not yet been

ratified by all the parliaments (Brazil andParaguay have still to decide).

The common external tariff ranges from 0to 35 per cent (average 13 per cent). Intra-Mercosur trade is duty-exempt for 90 percent of the products specified on the un-weighted list. The general treaty provides forsizeable special regimes (cars, IT, telecom-munications, sugar, sensitive products) andexceptional regimes (special customs areas –Manaus and Tierra del Fuego – sited inBrazil and Argentina).

Following tax reforms, in force since July2007, the basic rate of VAT has been loweredfrom 23 to 22 per cent and the minimum ratefrom 14 to 10 per cent. On the other hand,several tax exemptions have been abolished.The tax base has been widened to include

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cigarettes, fruit and vegetables and financialservices, and the rate of duty set at 22 percent. Health care and public transport arecharged a 10 per cent levy.

■ Attitude towards foreign investorsForeign investment is unrestricted and notsubject to a declaration. All sectors are opento foreign investment, except for oil refining,fixed telephony and electricity supply. TheForeign Investment Act 1998 offers impor-tant financial incentives, including exemp-tion from tax and customs duties. Since 1987,the country has a free-zone regime offering

ad hoc tax breaks. Activity in these zones ismainly focused on logistics and supportservices. Botnia free zone is home to thepaper cellulose industry.

■ Foreign exchange regulationsThere are no restrictions on currency inflowsor outflows. The dollar is the de facto bench-mark currency, with a high proportion ofloans and deposits denominated in dollars.The peso has been freely floating since July2002. There are no exchange controls forimport payments. No authorisation is re-quired for capital and profit transfers.

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2

OPPORTUNITY SCOPE

BRAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS)


Mn USDMn USD


Brazil ArgentinaUSA China Germany ArgentinaBrazil USA ChinaParaguay

EXPORTS by products■ Meat 26%■ Leather and hide products 8%■ Foodstuffs 7%■ Cereals 6%■ Wool 5%■ Rice 5%■ Manufactured goods 21%■ Other 23%

■ Oil and oil by-products 23%■ Chemicals 19%■ Machinery and equipment 11%■ Electrical equipment 8%■ Transport equipment 7%■ Plastics 7%■ Foodstuffs 5% ■ Other 20%

IMPORTS by products

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400

500

600

0

200

400

600

800

1000

1200



Indicators Uruguay Regional averageEmerging

country average


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VenezuelaPopulation (million inhabitants): 27.0GDP (US$ million): 181,862


STRENGTHS• Venezuela boasts extensive oil, gas and

mining resources, with considerablereserves particularly heavy oil in theOrinoco River basin.

• The oil-export revenues give the countrythe means to extend its regional politicalinfluence particularly in the Caribbeanarea and within Mercosur.

• For energy-dependence and geographic-proximity reasons, the United States isstill the main market for Venezuelan oilproducts, political discordnotwithstanding.

• The external financial position has beenrelatively good.

WEAKNESSES• The economy continues to be highly

dependent on a hydrocarbon sector thatgenerates 90 per cent of exports and overhalf of fiscal revenues.

• Opaque management and discretionaryuse of oil revenues have cast a pall overthe economic outlook.

• A lack of investment has limited thestate-owned oil company Petroleos deVenezuela S.A.’s (PDVSA) productioncapacity, with a portion of its revenuesallocated to social programmes.

• State interventionism and extensivecorruption have undermined confidencein business circles and deterred privateinvestment, impeding the economicdiversification needed to achieve morebalanced growth.

RISK ASSESSMENTThe oil wealth should help keep economicgrowth relatively strong, even if it has beenin steep decline due to flat hydrocarbonproduction and deterioration of the businessclimate. The priority given to redistributionof oil export revenues to the detriment ofproductive investment will nonetheless jeo-pardise the sustainability of growth. And theincrease in quasi-fiscal spending, via thenational development fund, Fondo de Desar-

rollo Nacional (FONDEN) or the state-ownedoil company, Petroleos de Venezuela S.A.(PDVSA), will ultimately expose the countryto difficult-to-make adjustments in case of asustained decline in oil prices.

Expansionary fiscal and monetary policy,in conjunction with high-production capacityutilisation, has generated strong inflationarypressures despite price controls. Although adownward exchange rate adjustment couldoccur due to the inflation differentialbetween

VENEZUELA

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2

Venezuela and its main trading partners,government officials have sought to deferaction in that regard.

The windfall associated with still-high oilprices this year nonetheless indicates thatan already relatively strong external finan-cial position will be maintained, with mod-erate debt ratios. However, the large currentaccount surplus should shrink a bit moreamid stagnating oil production and boomingconsumer-goods imports, and financingneeds have been growing. The governmenthas tapped nearly half of foreign exchangereserves on behalf of FONDEN, and capitalflight has continued despite exchange con-trols.

The ‘21st century socialism’ advocated byPresident Chavez since his re-election late2006 has resulted in increasing government

intervention in the economy, nationalisa-tions and an increase in barriers to privateinitiative. Nevertheless, the rejection byreferendum late 2007 of the constitutionalreform sought by the president representedhis first electoral setback in nine years anddispelled his aura of invincibility.

In a business climate marked by relativeunpredictability, some sectors are affectedby a more restrictive imports policy (cars,alcohol, tobacco, maintenance services, tech-nical assistance), and recurring paymentdelays have been observed due to administra-tive red tape associated with the exchangerate mechanism managed by the Comisionde Administracion de Divisas (CADIVI) –foreign currency commission but withoutresulting in real difficulties thus far.



Economic growth (%) -7.8 18.3 10.3 10.3 8.3 5.5Inflation (average annual rate) 31.1 21.7 16.0 13.7 18.1 19.8Public sector balance (%GDP) 0.2 2.5 4.1 -1.5 -0.5 -0.8Exports 27.2 38.7 55.5 65.2 69.5 76.6Imports 10.7 17.3 23.7 32.2 46.6 56.7Trade balance 16.5 21.4 31.8 33.0 22.9 20.0Current account balance 11.5 13.8 25.5 27.2 17.2 15.2Current account balance (%GDP) 13.7 12.3 17.8 15.0 7.4 5.2Foreign debt (%GDP) 48.5 38.8 31.7 24.3 22.7 19.3Debt service (%Exports) 13.3 9.0 8.1 5.8 6.6 5.6Foreign exchange reserves (in months of imports) 10.2 7.6 8.2 7.9 6.0 6.0



■ Market overviewIn its customs nomenclature the countrydistinguishes between so-called ’priority’goods and other goods whose import is subjectto the issue of a national non-production orinsufficient production certificates. As theVenezuelan nomenclature is still at an em-bryonic stage, numerous tariff codes aremissing from both the ‘priority goods’ andother goods lists. The regulations are notonly intricate; they are frequently choppedand changed thereby forcing companies to

constantly keep up with the changes andbear the costs associated with compliance.

■ Means of entryApart from exchange controls, various tariffmeasures remain in place, including pricecontrols on foodstuffs, cement and wastetreatment. Some prices have remained at2003 levels, whereas aggregate inflationbetween 2003 and end 2007 has overshot 100per cent.

Non-tariff measures include widespreaddiscretionary licensing of importers (in par-ticular for basic foods), a reduction in thenumber of licence awards, stringent health

THE AMERICAS

234

restrictions, compulsory product labellingwith mention of origin and discriminationagainst imported products, complemented byspecial treatment under foreign exchangerules for some South American productstraded within the framework of Latin Amer-ican Integration Association (LAIA).

In the field of government procurement,preferential measures are applied in favourof local companies that show a domesticadded value of over 20 per cent. This deviceis tantamount to knocking 20 per cent off thevalue of a local bid before comparing it withforeign bids.

■ Attitude towards foreign investorsThe constitution grants foreign and domesticinvestors equal rights and duties. However,the retaking of economic control by thegovernment and the public-sector and the

desire to develop ‘industrialising schemes’seems to work in favour of local operatorsrather than foreign private partners. Thedeepening of ‘21st-century socialism’througha root and branch review of the constitutionrisks reinforcing this trend.

Intellectual property protection is a causefor concern, especially for textiles and phar-maceuticals. The reform of the constitutionis raising doubts about trademark and patentprotection, despite government assurancesto the private sector.

■ Foreign exchange regulationsBoth exchange and price controls have beenin force since February 2003. It can takeseveral months to obtain foreign exchangefrom the exchange control authority (CA-DIVI), especially for repatriating capital,dividends and technical assistance.


0

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WORLDVenezuela

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2

OPPORTUNITY SCOPE



Mn USDMn USD


USA ChinaNetherlandsAntilles

Spain Colombia ColombiaUSA Brazil ChinaMexico

EXPORTS by products■ Oil and gas 90%■ Iron and steel 4%■ Other 6%

■ Raw materials and intermediate goods 42%■ Capital goods 31%■ Consumer goods 23%■ Other 4%

IMPORTS by products

0

5000

10000

15000

20000

25000

30000

35000

0

2000

4000

6000

8000

10000


STANDARD OF LIVING/PURCHASING POWER

Indicators Venezuela Regional averageEmergingcountry average


3

Asia

Outlook for 2008:Asia 238

Afghanistan 245Australia 246Bangladesh 249Cambodia 253China 255Hong Kong 259India 263Indonesia 267Japan 271Laos 275Malaysia 277Mongolia 281Myanmar 283Nepal 285New Zealand 286Pakistan 289Papua New Guinea 293Philippines 295Singapore 299South Korea 303Sri Lanka 307Taiwan 310Thailand 314Vietnam 318

OUTLOOK FOR 2008

238

OUTLOOK FOR 2008

AsiaChristine Altuzarra, Constance Boublil, and Olivier Oechslin

Economic Studies and Country Risk Department, Coface

JAPAN

■ Good corporate health overall, butdisparate underlying situations

Economic growth was less buoyant in 2007despite stronger household consumption.Ex-ports slowed and investment stalled. Eco-nomic activity in Asia will continue to driveexports in 2008, partly offsetting the Ameri-can demand slowdown and yen appreciation.Faced with the rising cost of energy andcertain raw materials, corporate investmentand hiring policies will remain prudent.Despite the shortage of skilled labour, wagegrowth will be limited, which will underminehousehold consumption. There will be littleupward price movement, raising the spectreof deflation risk.

Corporate earnings growth should thus beslower. Majorexport-orientedmanufacturerswill remain in good financial health whilesmaller companies operating mainly in thedomestic market and the services sector willtend to experience difficulties.

The automotive industry, chemicals,steel, mechanical engineering andpaper sectors − rated ’A’ in Japan – present


-2.0%

-0.1%

2.9%

0.2% 0.3%

1.4%

2.7%1.9% 2.2% 1.9% 1.7%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007(e)

2008(f)

-100

-50

0

50

100

150

200

250

300

Economic growth (%)


low risk. Export intensive, they will continueto benefit from the still strong demand inAsia, despite erosion of their price competi-tiveness. These sectors should thus sufferonly moderately from the world demandslowdown. Mass distribution (rated A-)will continue to restructure amid the contin-uing struggle of domestic consumption torebound. Completely resolving the problemsin the construction sector (rated B-) posedby the tightening of anti-seismic standardswill be a slow process, which will continue toaffect lead times for new housing starts.Public works will continue to suffer from thereduction in government and local commu-nity investment. Sectors presenting higherrisk, including textiles (rated B) and cloth-ing (rated C-), the IT industry (rated B-),electronic components, network equip-ment and mobile telephonymanufactur-ers (rated B+) will be subject to intenseregional and local competition with theirmargins squeezed in consequence; airtrans-port (rated B-) will have to contend withstiffer competition with Japanese airportsopening up more to international airlines.

Scale of sectoral risk: Japan

D

C+

C–

B–

A

C

A+

A–

B

B+

Highest risk

Lowest risk

Clothing

Mechanical engineering / Paper / Car industry / Steel / Chemicals

Pharmaceuticals/ Electronic components Telecommunications (equipment manufacturers)

Mass retail

Textiles

Telecommunications (operators)

IT industry / Air transport Building & public works

OUTLOOK FOR 2008

239

3

EMERGING ASIA

■ Withstanding the American slowdownThe economic slowdown triggered inthe United States by the subprimemortgage crisis should only have amoderate effect on emerging Asia. Ec-onomic growth remained strong in 2007reaching 8.3 per cent and that buoyanttrend should continue in 2008, at 8.2 percent. Excellent performance by China andIndia, which represent 55 per cent ofemerging Asia’s GDP, strongly influencethe bright outlook for the region. Excludingthose two giant countries, regional growthwas 5.7 per cent in 2007 and should be5.6 per cent in 2008. Even under the mostpessimistic growth hypotheses moreover, aone-point decline in American GDP wouldresult in an estimated 0.4 points loss ofGDP growth for Asia excluding China. Andthe Chinese economy is even less sensitive– a one-point loss in GDP growth by theUnited States would only cost China 0.2points.

Emerging Asia’s resilience is attributableto several factors. Above all, the increas-ing influence of domestic demand onthe growth dynamic now enablesAsian countries to hold up better whentheir exports slow down. The contri-bution of domestic demand to regionalgrowth is now greater than that of netexports. Last year, private consumptionthus generated 3.0 points of growth, in-vestment 2.4 points and net exports only0.6 points of growth. China seems partic-ularly solid with its high rate of investmentconstituting a veritable engine of growth.In 2007, private consumption thus gener-ated 3.0 points of Chinese growth, invest-ment 4.7 points and net exports 3.0 points.Only two economies (Taiwan and SouthKorea) have shown weaknesses, albeitmodest, in their domestic dynamic. Thegreat financial solidity of most re-gional countries moreover providesprotection against a crisis of confi-dence. Asian countries have accumulatedforeign exchange reserves – thanks espe-cially to adoption of managed floating-exchange rate regimes – that represent 11

months of imports on average for the Asiaregion and 7.1 months of imports for theregion excluding China.

An American slowdown compoundedby a crisis of confidence could, how-ever, have localised impact on weakercountries in the region. The difficultiescould develop through three channels.Trade represents one possible channel:a decline in exports to industrialised coun-tries, the United States in particular,would affect emerging Asia whose exportsrepresent 55 per cent of GDP compared toa 28.5 per cent world average. Singaporeand Hong Kong would particularly sufferwith their exports representing, respec-tively, 197 and 163 per cent of GDP. Theintra-zone trade often cited as proof of thedecoupling between Asia and the UnitedStates needs to be put in perspective. Theproportion of intra-regional trade has cer-tainly increased, growing from 26 per centin 1985 to 37 per cent in 2006 while theproportion of trade with the United Statesdeclined from 23 to 18 per cent in thesame period. Half intra-regional trade in-volves merchandise intended for re-exportto industrialised countries. Including thatindirect trade, industrialised countries pro-vide a market for 61 per cent of Asianexports. The second channel is finan-cial: a greater aversion to risk could un-dermine countries dependent on foreigncapital. With most regional countries un-derpinned by large current account sur-pluses and foreign exchange reserves, therisks associated with this channel arelimited. The third potential channelconcerns confidence: An American re-cession would be most likely to shake con-fidence. Such a scenario could propagateshock waves notably undermining Chinesedomestic demand and possibly triggering adynamic, bringing investment to a virtualhalt. The likelihood of a crisis with majorbankruptcies would then be an appreciablerisk.

Economic performance in the regionis largely dependent on developmentsin the Chinese economy, which hasrecently given disquieting signs ofoverheating and overcapacity, espe-

OUTLOOK FOR 2008

240

cially in steel, the automotive industry,distribution and property. The economicpolicy and administrative measures takenby the government are intended to achievegreater control over growth and especiallyinvestment to ensure a soft landing. Al-though not the most likely scenario, a hardlanding nonetheless remains a significantrisk with growth currently running out ofcontrol. Such a scenario could have majorconsequences in the region with a growingproportion of intra-regional trade involvingChina, which moreover invests massivelyin other Asian countries.

GDP growth higher than emerging country average (%)

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008

Asia Emerging Countries

With a much more self-centred econ-omy than other Asian countries, India’seconomic health should have little de-pendence on the economy of either theUnited States or China. Similarly, with itslimited imports, India cannot yet stand in forthose two countries as the world locomotive.Domestic demand remains the main growthengine with private sector investment accel-erating and consumption remaining strong.The tightening ofmonetarypolicy inresponseto inflationary pressures and the moderatedeterioration of external accounts could re-sult in a slight slowdown.

GDP growth (%)

0123456789

101112

Emer

ging A

siaChin

aIn

dia

Vietnam

Pakis

tan

Philip

ines

Singa

pore

Indon

esia

Mala

ysia

Hong Kong

South

Korea

Taiwan

Thaila

nd

2007

2008 f

■ Persistent risks despite the financialsolidity

External overindebtedness constitutesan undeniably limited risk

Debt ratios continue to improve in emerg-ing Asia with the region’s debt representing20 per cent of GDP compared to 28 per centon average for all emerging countries. Theratio of debt service to foreign currencyearnings is also low, about 4.6 per cent foremerging Asia against 9.1 per cent for allemerging countries. Asian countries thusgenerally enjoy excellent external financialhealth.

External debt ratios lower than emerging country average (%) (debt/export of goods and services)

0%

50%

100%

150%

2001 2002 2003 2004 2005 2006 2007 2008


Foreign exchange reserves have reachedrecord levels – 11 months of imports in 2007against 9.5 on average for all emergingcountries. This masks, however, disparitiesin liquidity terms with the reserves of Viet-nam, Indonesia, the Philippines and aboveall Pakistan and Bangladesh remaining lowand exchange rate risk remaining apprecia-ble in consequence.

There have been new developments on theuse of currency reserves. The Singaporeanholding company, Temasek, which invests inAsia on the government’s behalf and espe-cially the September 2007 launch of theChinese sovereign fund, China InvestmentCorporation, can serve as examples. China,underpinned by its extensive reserves, is inthe process of becoming a major capitalexporter with Chinese direct investmentabroad increasing from just US$200 millionin 2003 to US$26 billion in 2007. ManagingUS$200 billion tapped from the currencyreserves, China Investment Corp shouldcontinue to contribute to the increase inChinese outgoing FDI.

OUTLOOK FOR 2008

241

3

0

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18

20

China

Taiwan

India

Mala

ysia

South

Korea

Thaila

nd

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nesia

Philipine

s

Pakist

an

Vietnam

Hong K

ong

2007 e

2008 f

Currency reserves in months of imports

The large aggregate current accountsurplus for emerging Asia obscures dis-parate financial situations across theregion

Comfortable current account surplus

(% of GDP)

0%

1%

2%

3%

4%

5%

6%

7%

2001 2002 2003 2004 2005 2006 2007 2008


The ASEAN countries, South Korea andMainland China have run large currentaccount surpluses. The truly remarkableChinese surplus increased again in 2007.Concerned by that rapid growth, Chineseofficials have taken fiscal measures intendedto limit exports. They will only have amarginal impact, however, and the currentaccount surplus will remain large due to thegeographic and sectoral diversification ofChinese exports. The Chinese textile/cloth-ing sector has notably remained very com-petitive, thanks to the low-cost labour evenif its contribution to exports has been de-creasing, down from 32 per cent in 1990 to15 per cent in 2006. The contribution of theelectronics, machine tool and transport sec-tors has moreover been growing and nowrepresents 55 per cent of Chinese exports.And the moderate yuan appreciation – up 5per cent against the dollar in 2007 and up 7per cent expected in 2008 – will be unlikely

to jeopardise China’s price competitiveness.Massive production transfers to ContinentalChina have enabled regional economies spe-cialised in high-value-added products, likeelectronics, to stay competitive. Technologytransfers are not, however, exempt from riskand could even ultimately exacerbate com-petition. To deal with that problem, Taiwan,Singapore, South Korea, Malaysia and Thai-land continue to invest in R&D, promoteservices and develop their infrastructure.

South Asian economies, conversely, havebeen running current account deficits, mod-erately so in India (a negative 1.3 per cent ofGDP in 2007/2008 and 1.1 per cent expectedin 2008/2009), more severely in Sri Lanka(nearly 4.0 per cent in 2007 and 2008) andespecially in Pakistan (over 5.5˚per˚cent ofGDP for the same two years). Exports andespecially transfers from workers abroad,mainly in the Gulf region, have remaineddynamic, but the oil bill has affected thosecountries with their great dependency onhydrocarbon imports. The capacity to with-stand competition from China in textilesvaries by country. Satisfactory in India andSri Lanka, which have been able to find nichemarkets, it has been weaker in Pakistan andespecially Bangladesh, which suffers from itspoor business environment and political un-certainties. In India, exports are much morediversified with the other sectors (metal-lurgy, the automotive industry, pharmaceu-ticals and the IT industry) driving goods andservices exports.

The large current account surplusesin most emerging Asian countries haveresulted in an excess of liquidity in thestock, property and credit markets.

Risks of speculative bubbles will thusbear watching in emerging Asia. InChina, with the Central Bank only ’sterili-sing’ half the money created, the resultingsurplus liquidity ends up in the stock market.The Shanghai stock market index (thatconcerns domestic investors) more thanquadrupled in 2007, after increasing 130 percent in 2006. The price earnings ratio (PER)– the ratio between the average share priceand the previous year’s average profits –reached 65 on the Shanghai stock marketcompartment A, meaning that the value of

OUTLOOK FOR 2008

242

the companies is 65 times larger than theprofits they made the previous year. Theprice earnings ratios in India and Indonesia– above 23 – were also high at the end of2007, signifying the formation of speculativebubbles.

The bursting of a speculative bubblewill nonetheless not have the samesignificance if the bull market preced-ing the crash is caused by massiveinflows of portfolio investment as op-posed to an abundance of local savings.In China, domestic savings were mainlyresponsible for driving up the indices. Asudden stock market collapse could result ina negative wealth effect and a decline indemand from households with access to thosemarkets. The overall impact on growthshould be limited there. In India and Indo-nesia, however, as well as in the Philippines,the bursting of a bubble would give rise tocapital flight with major repercussions onexchange rates and thus on inflation andeconomic activity.

Price earning ratio at 22 October 2007

13.6

14.1

14.2

14.5

17.2

20.4

23.3

24

30.1

65

5 15 25 35 45 55 65

South Korea

Philippines

Thailand

Pakistan

Brazil

Russia

India

Indonesia

China A

China B

■ Disparities on governanceThe political stability in emerging Asia andthe predictability of economic policies consti-tute majors assets and have been partlyresponsible for the high investment rates.Occasional upsurges of tensions along withpolitical gridlock in certain countries none-theless also characterised 2007. Althoughrelations between North and South Koreahave been improving, prospects for the con-clusion of a peace treaty remains unlikely.The Taiwan question, meanwhile, continuesto be a potential source of tensions especiallywith Beijing playing the opposition off

against a weakened president. In Thailand,the capacity of the government formed afterthe December 2006 elections to implementviable economic policies remains uncertainin view of the dissension within the coalitionand the rules facilitating no-confidence votesincluded in the new Constitution. The end of2007 was moreover marked by the uprisingof monks in Myanmar seeking both changesin the social sphere and political liberties.Growing inequality in China has given riseto considerable civil unrest triggered byrequisitions of farmland. In Pakistan, 2007was a year of severe political turmoil, withthe proclamation of a state of emergency on6 October and the assassination of BenazirBhutto at the end of December. The year2008 should be another troubled one. InBangladesh, although the establishment ofa state of emergency in January 2007 andpostponement of elections until end 2008 atthe earliest freed the country from gridlock,the challenge for officials now is to restoredemocratic institutions without promptingrenewed violence. In Sri Lanka, the war isdragging on in the north of the island butwithout affecting the rest of the country thusfar.

As regards governance, great diversitycharacterises the Asian continentasreflectedby the new Coface business climate ratingsystem: Japan and Singapore are rated A1with Taiwan, Hong Kong and South Koreaclose behind due to poorer performance ondebt collection, financial information and theinstitutional environment. The situation re-mains respectable in Malaysia and Thailandrated A3. India is rated A4, with a satisfac-tory legal system compensating for a complexregulatory framework for business that isnot always fair to companies. In China andthe Philippines, rated B, the business climatesuffers from a high level of corruption and asevere lack of transparency in financialinformation that hampers risk assessment.In Sri Lanka, the business environment hasbeen relatively satisfactory despite seriousinfrastructure deficiencies. The situation isrelatively poor, however, in Indonesia, Paki-stan, Vietnam and Mongolia, rated C due toserious deficiencies in the transparency offinancial information and in debt collection

OUTLOOK FOR 2008

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3

Business climate rating: Asia

Australi

a

Japan

Singa

pore

Korea

Hong K

ong

Taiwan

Mala

ysia

Thaila

ndIn

dia

China

Philip

pines

Sri L

anka

Indon

esia

Mon

golia

Pakist

an

Vietnam

Bangla

desh

Cambo

diaLa

os

Mya

nmar

Nepal

Papua N

ew G

uinea

A1

D

C

B

A4

A3

A2

procedures and to extensive corruption. InBangladesh, Papua New Guinea, Myanmar,Cambodia and Laos (rated D), the businessenvironment suffers from major governanceshortcomings that tend to deter investors. Inmany countries moreover intertwined busi-ness and political worlds continue to markthe investment climate.

■ A good payment incident index forAsian companies

In a context of economic dynamism andfinancial stability, non-payment continues tobe very limited. In India, Indonesia, thePhilippines, Vietnam and even in Thailand,companies have strengthened their financialsituations and demonstrated good paymentbehaviour despite sometimes deficient cor-porate governance. In China, Malaysia,South Korea and Taiwan, however, certainlocalised sectors have suffered in the face ofmore intense competition. In China, theCoface payment experience attests to alengthening of payment times, notably in theprivate sector focusing on the domestic mar-ket, where the producers are very numerousand the sectors suffer from overcapacity. Theprospect of a moderate slowdown could leadto an increase in credit risk. In South Korea,the Coface payment incident index reflectsdeterioration in the construction and whole-saling sectors. In Malaysia, payment inci-dents also increased somewhat in chemicals,

perfumery and cosmetics, as well as inelectronics, a sector also vulnerable in Tai-wan where corporate margins have beenshrinking. The Taiwanese electronics sectorcould moreover suffer from the Americandemand slowdown.


9.3%8.8%

8.0%

6.5%

3.1%

6.1%

7.2%

4.8%

6.5%7.1%

7.9% 7.9%8.5% 8.7% 8.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1994

1995

1996

1997

1998

1999

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7 (e

)

200

8 (f

)

0

50

100

150

200

250

300

Economic growth (%)


■ Country @rating trendsThe level of risk in emerging Asia has beenstable and well below the overall average foremerging countries. Singapore and HongKong are still rated A1. South Korearemains in A2 despite the difficulties experi-enced by smaller non-manufacturing com-panies. Malaysia’s rating is also A2reflecting the good economic conditions itenjoys and its robust financial health. Al-though China continues to be rated A3, thelengthening payment times in the countrywill bear watching. Indian companies (A3)remain solid. Vietnam, Indonesia and the

OUTLOOK FOR 2008

244

Philippines are still rated B. Despite thestrong growth in these three countries, theyare still rated B due to governancedeficiencies.

The country @rating for Thailanddroppedfrom A2 to A3 due to deterioration in thepolitical situation and the business climatesince September 2006 coup. Measures tocontrol volatile capital taken late 2006,revision of shareholder rules for joint ven-tures and promotion of a self-sufficiencyconcept have severely eroded the image of acountry traditionally hospitable to foreigninvestors. Despite adoption of a new consti-tution, furthermore, and the installation of agovernment after the December 2007 elec-tions, uncertainties over the government’scapacity to implement stable and viableeconomic policy continue to mark the situa-tion in Thailand.

Taiwan (rated A1) has been negativewatchlisted since December 2006. Deterio-

ration of corporate financial health notablyin the electronics sector and the likely impactof the American slowdown on the Island’sexports underlie the decision to maintain thewatchlist status at a level of risk thatnonetheless remains very low.

The country @rating for Bangladesh fellfrom B to C in view of the economic repercus-sions of tropical cyclone Sidr in Novemberlast year and especially the hard times facedby a textiles sector that generates 75 per centof total exports. These difficulties are largelyattributable to the recurrent civil unrest, arelatively poor business environment andthepolitical uncertainties that affect invest-ments. Conversely, the lifting of Sri Lanka’snegative watchlist status reflects the factthat the conflict in the northern part of theisland has not affected the rest of the country,which has benefited from a dynamic textilessector.


January2002

January2003

January2004

January2005

January2006

January2007

January2008

Hong Kong A2 A2 A2➚ A1 A1 A1 A1Japan A2 A2 A2➚ A1 A1 A1 A1Singapore A2 A2 A1 A1 A1 A1 A1Taiwan A2 A2 A1 A1 A1 A1➘ A1➘

South Korea A2 A2 A2 A2 A2 A2 A2Malaysia A2➘ A2 A2 A2 A2 A2 A2China A3 A3 A3 A3 A3 A3 A3India A4 A4 A4 A3 A3 A3 A3Thailand A3 A3 A3 A2 A2 A2➘ A3Indonesia C C C➚ B B B BPhilippines A4 A4 A4 A4➘ B➚ B BSri Lanka B B B B B➘ B➘ BVietnam C B B B B B BBangladesh B B B B B B CPakistan D D D➚ C C C C

AFGHANISTAN

245

3

AfghanistanPopulation (million inhabitants) 31.1GDP (US$ million) 8,339


RISK ASSESSMENTThe economy grew 13 per cent in 2007–2008according to IMF estimates, against 7.5 percent in 2006–2007, thanks to better weatherconditions after a lack of rain affected har-vests a year earlier. The growth rate shoulddrop back to around 10 per cent in comingyears. Investment in the construction sectorsupported by foreign aid continues to under-pin the economy. Private consumption hasalso been growing at a significant rate partlyspurred by the large revenues connectedwithillegal opium poppy cultivation.

It is estimated that opium production wasup 37 per cent in 2007 after increasing 49per cent in 2006 and now represents theequivalent of half of GDP, with Afghanistanproducing 90 per cent of the total worldsupply. The trafficking breeds widespread

corruption and increases the power of certainlocal potentates.

The central government has thus experi-enced difficulties in asserting its authority insome provincial areas. Even more troubling,NATO forces are still unable to retakeTaliban-controlled areas with military vic-tory appearing unlikely in the near term.The current political situation marked bysevere tensions between the president, thelower chamber and the regions shouldpersistin 2008 and early 2009. Leadership of thecountry after the presidential electionsscheduled for 2009 remains, however, amajor uncertainty with the incumbent Pres-ident Hamid Karzai, although legally quali-fied to run again, having already announcedthat he would not seek another term.


USD millions (*) 2003/4 2004/5 2005/6 2006/7 2007/8(e) 2008/9(f)

Economic growth (%) 15.7 8.0 14.0 7.5 13.0 8.4Inflation (period-end %)[Query:Amended as per the source file.Please check.]

10.3 14.9 9.4 4.8 6.0 5.0

Public sector balance (%GDP) –3.0 –1.2 0.9 –2.7 –2.6 –2.0Exports 1,894 1,643 1,795 1,923 2,060 2,172Imports 3,786 3,873 4,317 5,096 5,324 5,550Trade balance –1,892 –2,230 –2,522 –3,173 –3,264 –3,378Current account balance (%GDP) –51.0 –44.9 –41.9 –44.5 –40.7 –36.5Foreign debt (%GDP) 10.9 162.2 37.5 14.6 13.2 12.9Debt service (%Exports) 4 3.9 3.8 1.1 0.5 0.4Foreign exchange reserves (inmonths of imports)

3.1 4.1 4.5 5.0 5.1 5.2

*Financial year starting 1 April, = ex grants, e = estimate, f = forecast

ASIA

246

AustraliaPopulation (million inhabitants): 20.6GDP (US$ million): 782,100


RISK ASSESSMENTEconomic growth was strong in 2007, drivenby buoyant domestic consumption. House-hold disposable income increased and com-panies pursued their investmentprogrammes, mostly in the mining sector.This sector’s good sales performance abroadoffset the weaker sales performance of farmproducts. The sharp import rebound contrib-uted to widening the current account deficit.

Domestic demand will continue to under-pin growth in 2008. The job market willremain buoyant with unemployment level-ling off, which will put upward pressure notonly on wages but also inflation, exacerbatedmoreover by the prices of energy and foodproducts. The inflationary pressures willprompt the central bank to maintain its tightmonetary policy. Rising interest rates inconjunction with more difficult conditions ofaccess to credit will thus squeeze propertyinvestment by households already deeply indebt (161 per cent of disposable income). Butthey will continue to benefit from income taxreductions that will mitigate the pressure ontheir purchasing power. Strong world de-mand for iron ore driven by emerging Asiancountries will allow sector companies to

continue investing despite the tighter creditconditions. They will remain dynamic onexports meanwhile notwithstanding theAus-tralian dollar appreciation. The drought stillravaging the eastern part of the country willmoreover continue to limit farm productsales abroad. Imports will rise sharply again,further widening the current account deficit.Spending announced bythe newgovernment,especially on health, education and portinfrastructure, should have little effect onthe fiscal surplus with the economy continu-ing to generate ample tax revenues.

Although companies will continue to makegood profits, this overall performance masksthe disparity between the mining and man-ufacturing sectors with rising labour costs,higher interest rates, and the Australiandollar appreciation squeezing manufacturermargins. Companies connected with the res-idential construction, retail and wholesalesectors will bear particularly close watching.Leisure sectors could suffer from a tourismslowdown. The buoyant economic conditionshave at this juncture resulted in a decline inbankruptcies, a trend consistent with thegood Coface payment incident index forAustralia below the world average.

AUSTRALIA

247

3


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 3.1 3.7 2.9 2.7 4.1 3.5Consumption (var.) 3.5 5.7 2.9 3.0 4.0 3.0Investment (var.) 9.1 7.6 7.8 8.6 12.7 6.7Inflation 2.8 2.4 2.7 3.5 2.4 2.9Unemployment 5.9 5.4 5.1 4.8 4.4 4.4Short-term interest rate 4.8 5.2 5.4 5.9 6.7 7.4Public sector balance (%GDP) 1.3 1.0 1.2 1.2 1.3 1.2Public sector debt (%GDP) 18.7 17.3 16.8 16.1 15 13.8Exports (var.) −1.2 4.3 2.4 3.3 3.4 4.9Imports (var.) 11.1 14.9 8.5 7.5 10.4 7.4Current account balance (%GDP) −5.5 −6.1 −5.7 −5.4 −6.0 −6.4


PAYMENT AND COLLECTION PRACTICESAs a former colony of the British crown,Australia’s legal system and legal preceptsare broadly inspired by British ‘common law’and the British court system. On 1 January1901, the six British colonies formed thedominion of Australia as an independentfederated union within the Commonwealth.

■ PaymentsBills of exchange and promissory notes arenot widely used in Australia and are consid-ered, above all, to authenticate the existenceof a claim. Cheques, defined as ‘bills ofexchange drawn on a bank and payable onpresentation’, are commonly used for domes-tic and even international transactions.

SWIFT bank transfers are the most com-monly used payment method for interna-tional transactions. The majority ofAustralian banks are connected to theSWIFT electronic network, offering a rapid,reliable and cost-effective means of payment.

The Australian dollar, along with the mainforeign currencies, is now also part of theContinuous Linked Settlement System(CLS), a highly automated interbank trans-fer system for processing international tradesettlements. Moreover, the handling of pay-ments via the client bank’s Internet site isbecoming increasingly commonplace.

■ Debt collectionThe collection process starts with service ofan order to pay via a registered ‘seven-day

letter’, reminding the client of his obligationto pay the amount due plus any contractuallyagreed interest penalties or lacking such apenalty clause, interest at the legal rateapplicable in each state. Absent payment bythe debtor company and if the creditor’sclaim is due for payment, uncontested, andover AUD2,000 (or after a ruling has beenmade), the creditor may issue a summonsdemanding payment within 21 days. Unlessthe debtor settles the claim within therequired timeframe, the creditor may lodgea petition for winding up of the debtor’scompany, considered insolvent (statutory de-mand under section 459E of the CorporationsAct 2001).

Under ordinary proceedings, once a state-ment of claim (summons) has been filed andwhere debtors have no grounds on which todispute claims, creditors may solicit a fast-track procedure enabling them to obtain anexecutory order by issuing the debtor withan ‘application for summary judgement’.Thispetition must be accompanied by an affidavit(a sworn statement by the plaintiff attestingto the claim’s validity) along with supportingdocuments authenticating the unpaid claim.

For more complex or disputed claims,creditors must instigate standard civil pro-ceedings, an arduous, often lengthy processlasting up to two years given the fact thatcourt systems vary from one state to thenext. During the preliminary phase, theproceedings are written insofar as the court

ASIA

248

examines the case documents attesting tothe parties’ respective claims. During thesubsequent ‘discovery phase’, the parties’lawyers may request their adversaries tosubmit any proof or witness testimony thatis relevant to the matter and duly examinethe case documents thus submitted.

Before handing down its judgement, thecourt examines the case and holds an adver-sarial hearing of the witnesses who may becross-examined by the parties’ lawyers. LocalCourts or Magistrates Courts (depending onthe state) hear minor disputes involvingamounts ranging from a minimum A$40,000in the State of South Australia up to amaximum A$100,000 in the States of Victoriaor Northern Territory.

Beyond these various thresholds, disputesinvolving financial claims up to A$750,000 inNew South Wales, A$500,000 in WesternAustralia or A$250,000 in Queensland, forexample, are heard either by the CountyCourt or District Court, depending on thestate. Claims equal to those thresholdamounts or greater are heard by the SupremeCourt of each state. Since January 2007, theState of Victoria grants the County Court thejurisdiction to hear disputes irrespective ofsize of claims involved.

As a general rule, appeals lodged againstSupreme Court decisions, where a prior

ruling in appeal instance has been handeddown by a panel of judges, are heard by theHigh Court of Australia, in Canberra, whichmay decide, only with ‘leave’ of the courtitself, to examine cases of clear legal merit.The right of final recourse before the PrivyCouncil, in London, was abolished 3 March1986 (Australia Act 1986).

Lastly, though the Australian legal systemdoes not have commercial courts per se, incertain states, such as New South Wales,commercial sections of the district or su-preme courts offer fast-track proceedings forcommercial disputes. Since 1 February 1977,Federal courts have been created alongsidethe state courts and established in each statecapital. The federal courts have wide powersto hear civil and commercial cases (likecompany law, winding up proceedings) aswell as fiscal or maritime matters, intellec-tual property, consumer law and so on. Incertain cases, the jurisdictional boundariesbetween state and federal courts may beindistinct and this may lead to conflictsdepending on the merits of each case. Arbi-tration and Alternative Dispute Resolution(ADR) procedures may also be used to resolvedisputes more rapidly and obtain out-of-court settlements, often at a lower cost thanthrough the ordinary adversarial procedure.


0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDAustralia

BANGLADESH

249

3

BangladeshPopulation (million inhabitants): 144.3GDP (US$ million): 61,961

Country @rating: CMedium-term rating: High riskBusiness climate rating: D

STRENGTHS• The clothing manufacturing sector has

contributed to the country’s developmentsince the early nineties.

• Transfers from emigrant workers,employed mainly in the Gulf region, andinternational aid, allow the country tocompensate 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 thetextiles sector.

• The business climate has majorshortcomings.

• A lack of infrastructure (particularlyelectricity) has impeded growth.

• The fiscal deficit remains large.

RISK ASSESSMENTIn the fiscal year 2006–2007 starting 1 July,economic growth, the disturbances linked toelectoral-period instability and the institu-tion of a state of emergency early last yearhad little effect on GDP growth, up 6.5 percent. Beyond the human toll, the cyclone inNovember 2007 should, however, have asignificant impact on economic growth in2007–2008, which should drop below 6 percent due to the damage done in the main riceproduction region. In conjunction with risingprices for farm products, the inflationarypressures resulting from the cyclone shouldaffect household consumption. Grain im-ports, reconstruction spending and highersubsidies of petrol prices should, moreover,undermine public finances.

The difficulties faced in recent months bytextiles, a sector that generates 75 per centof exports, compound the effects of the

natural catastrophe. Recurrent socialunrest,a severe lack of infrastructure and skilledlabour, along with a relatively difficult busi-ness environment for private companies ex-plain why some foreign buyers have soughtalternative sources of supply. The sectornonetheless continues to enjoy assets thatbolster its competitiveness, notably a low-cost, hard working labour force.

Political uncertainties have also contrib-uted to the low investment rate. Institutinga state of emergency in January 2007 andpostponing the elections to end 2008 at theearliest undeniably enabled the country toovercome the political gridlock. The chal-lenge for government officials now is torestore democratic institutions without trig-gering a resumption of violence, particularlybetween the two traditional parties, theBangladesh Nationalist Party and theAwami League.

ASIA

250


USD billions(*) 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.3 6.0 6.6 6.5 5.8 6.2Inflation (%) 5.7 9.2 7.0 6.8 8.9 8.2Public sector balance (%GDP) −3.6 −3.5 −4.0 −4.5 −3.8 −4.2Exports 7.1 8.2 9.3 11.6 11.7 11.9Imports 9.5 11.2 12.5 14.4 16.0 17.5Trade balance −2.4 −3.0 −3.2 −2.9 −4.3 −5.6Current account balance 0.1 −0.3 −0.2 1.2 0.8 0.3Current account balance (%GDP) 0.2 −0.5 −0.3 1.8 1.1 0.4Foreign debt (%GDP) 37.1 32.5 32.2 31.2 28.5 25.4Debt service (%Exports) 5.9 5.2 5.2 5.0 5.0 5.1Foreign exchange reserves (in months of imports) 2.42 2.20 2.13 3.03 3.18 3.73

*fiscal year starting 1 July of current calendar year, e = estimate, f = forecast


■ Market overviewA vibrant private sector operating in a liberaleconomic system is ensuring diversificationof the country’s economic base and thedevelopment of new sectors of activity. Theemergence of a middle class with risingpurchasing power and changing consumerhabits in this country of 150 million inhabi-tants offers real opportunities for importgrowth.

■ Means of entryBangladesh’s import conditions are set outin the Import Policy Order (IPO) whose latestversion covers the 2007–2009 period. Thisdocument defines general import rules, con-ditions for opening letters of credit, specialregulations for products intended for humanconsumption and special import regimes(temporary, free zones, inputs for export-orientated firms, etc). Products on the re-stricted list have been cut from 131 to 20 (inaccordance with the HS code), compared withIPO 2003–2006. Import formalities havebeen largely simplified.

There are three tiers of customs and importduty. The maximum rate of customs duty is25 per cent, following reductions of 15 and10 per cent in the previous top rate. Supple-mentary duty at rates of 20 and 60 per centis levied on a limited number of products inorder either to protect sensitive local indus-tries or to discourage imports. For wines and

spirits, the supplementary duty is 350 percent. VAT is levied at the standard rate of15 per cent. Two standard rate taxes –Advanced Income Tax and Advanced RateVAT (3 per cent and 1.5 per cent, respectively)– apply to the pre-tax price of products. Thesetaxes are partially deducted at source fromcorporation tax and VAT collected by com-panies. Many product groups are exemptfrom taxes and duties, including foodstuffs,live animals and some commodities andchemicals.

■ Attitude towards foreign investorsFDI inflows into Bangladesh have more thandoubled in the last three years. Despite theopening up of some sectors (eg telecommuni-cations) and efforts to attract more FDI,complex formalities and the failure to reachdecisions on important investment proposalscould affect investor confidence.

Various laws and regulations govern do-mestic and foreign investment in the country.The Foreign Private Investment Act (1980)protects foreign investment against nation-alisation or expropriation and guaranteesfree repatriation of capital and dividends.There is no discrimination in favour ofdomestic investors.

A special system of free zones ExportProcessing Zones (EPZs) offers incentives toexport-led domestic and foreign investment.Free-zone investment enjoys 10-year taxexemption and reduced taxation for a further

BANGLADESH

251

3

five years, duty-free admission for importedmachinery and commodities and acceleratedasset depreciation. Investments may bewholly owned by a foreign entity and divi-dends may be fully repatriated. In 2007,80 per cent of investment in EPZs was foreignowned. The free zones have seen sharpgrowth in the last five years, with investmentup 12 per cent on a year-on-year basis to US$150 million in 2007.

■ Intellectual propertyBangladesh is a member of WIPO and asignatory to the WTO TRIPS agreement. Asa least developed country (LDC), it enjoys anexemption period until 2016 to put in placepatent protection legislation, especially for

pharmaceuticals. The reality on the groundis somewhat different in that it is difficult toenforce laws and regulations as the judicialprocess is slow, ineffective and rarely resultsin an outcome.

While Bangladesh does not appear toproduce counterfeit goods, such goods areopenly sold on the domestic market. Counter-feiting is particularly prevalent in theaudiovisual, software and consumergoods sectors. The main trading partners –the EU and the United States – believethat the situation in regard to intellectualproperty protection is getting worse as aresult of inadequate resources to tacklecounterfeiting.

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252

OPPORTUNITY SCOPE



Mn USDMn USD


USA UKGermany France Belgium IndiaChina Kuwait JapanSingapore

EXPORTS by products■ Clothes 82%■ Fish and shrimps 5%■ Jutes 3%■ Leather and hide products 2%■ Other 8%

■ Textiles 27%■ Capital goods 18%■ Oil and oil products 14%■ Cereals and dairy products 5%■ Other food items 14%■ Chemicals 11%■ Others 12%

IMPORTS by products

0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

2000

2500

3000

3500



Indicators Bangladesh Regional averageEmerging

country average

GNP per capita (PPP dollars) 2,340 5,929 5,983GNP per capita (USD) 480 1,814 2,313Human Development Index 0.530 0.683 0.672Wealthiest 10% share of national income 28 32 31Urban population % 25 37 44Percentage uner 15 years old 36 28 30Number of computers per 1,000 inhabitants 12 42 50

CAMBODIA

253

3

CambodiaPopulation (million inhabitants) 14.4GDP (US$ million) 7,193


RISK ASSESSMENTCambodia with 9.1 per cent growth in 2007and 8.0 per cent expected in 2008 is amongthe fastest growing economies in Asia, afterChina. The growth drivers include the devel-opment of tourism, a construction boom andabove all the remarkable performances ofthe textiles sector, which generates 80 percent of exports. But the growth rests onshaky foundations. The staying power ofcompanies in the textiles sector is attributa-ble more to the safeguard measures imposedon China by the European Union and theUnited States than to the sector’s owncompetitiveness. The current overheating inthe construction sector constitutes an addi-tional source of vulnerability. Similarly, thegood performance in the farm sector is morea reflection of favourable weather conditionsthan of progress on productivity. With agri-culture representing 34 per cent of GDP and70 per cent of the working population, Cam-bodia’s economic performances and the levelof consumption are largely dependent on the

harvests. The continuing widespreadpovertyin the country only accentuates that vulner-ability.

The country is highly dependent on inter-national financial backers. Official transfershave limited the fiscal deficit with conces-sional aid largely financing a substantialcurrent account deficit. But donors haveshown their displeasure at the country’sfailure to make progress incombatingcorrup-tion. International institutions have moreo-ver rated the quality of governance inCambodia harshly, which reflects the Cofacebusiness climate rating.

The domestic political situation has beenstable. After winning local elections in April2007 with 60 per cent of the votes cast, theCambodian People’s Party led by PrimeMinister Hun Sen will surely win the upcom-ing legislative elections in July 2008. Ten-sions could develop during the legalproceedings against the Khmer Rouge withthe principal leaders to stand trial startingin 2008 after many delays.

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USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 8.6 10.0 13.4 10.8 9.1 8.0Inflation (%) 0.5 5.6 6.7 2.8 3.8 3.8Public sector balance (%GDP) –6.0 –4.6 –3.4 –2.0 –3.1 –3.2Exports 2,087 2,589 2,910 3,693 4,313 4,793Imports 2,668 3,269 3,928 4,749 5,526 6,243Trade balance –581 –680 –1,018 –1,056 –1,213 –1,450Current account balance (%GDP) –10.8 –8.3 –9.5 –7.7 –8.6 –10.1Foreign debt (%GDP) 39 38 34 31 29 28Debt service (%Exports) 1.1 0.9 0.8 1.0 1.2 1.1Foreign exchange reserves (in months ofimports)

3.1 2.8 2.6 2.6 2.9 2.9


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ChinaPopulation (million inhabitants): 1,311.8GDP (US$ million): 2,668,071

Country @rating: A3Medium-term rating: Low riskBusiness climate rating: B

STRENGTHS• Industrial competitiveness and

diversification has benefited China’sexternal accounts.

• Foreign investment has facilitated aprogressive move upmarket.

• Infrastructure development, which hasaccelerated in the run-up to the 2008Olympic Games in Beijing, will fosterlong-term growth.

• A very high corporate saving rate hasfinanced most investment.

• The ascendancy of China on theinternational scene is a readilyobservable 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 foreigninvestors, Chinese banks are still weakamid strong growth of credit anduncertainty over the proportion of non-performing loans.

• Environmental problems constitute anobstacle to sustainable growth.

• The Taiwanese question remains a majorrisk factor.

RISK ASSESSMENTEconomic growth accelerated again in 2007(up by 11.5 per cent) spurred by stronginvestment. Officials have been concernedabout the overcapacity in the car, steel andconstruction industries, which could lead totighter margins and financial difficulties, arisk already evidenced by a lengthening ofpayment times recorded by Coface. In viewof the priority given to avoiding a cata-strophic hard-landing scenario, monetarypolicy will remain strict, the moderate yuanappreciation will speed up slightly, andfurther administrative measures intended tocool off the economy appear likely. A gradualslowdown is therefore the most probablescenario. But even then, credit risk oncompanies continues to grow with the over-capacity suggesting that a shakeout will beunavoidable. Inflation accelerated in 2007due mainly to rising food prices. Theremedial

measures taken – eight increases in manda-tory bank reserves and five interest ratehikes – had only a limited impact last year.Monetary policy will thus tighten further in2008.

Financially, despite the appreciable totalamount of extra-budgetary commitments,sovereign risk has remained limited. Moreo-ver, China’s external position is still verysolid, with foreign exchange reserves atrecord levels. The surplus liquiditygeneratedby the large current account surplus and themassive influx of capitals end up in the stockmarket, with the Shanghai stock marketindex more than doubling in 2007. The veryhigh price earning ratios prevalent in Chinacompared to those in other Asian stockmarkets are indicative of an emerging spec-ulative bubble. Volatility risk has thus beenvery high.

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Politically, China remains stable with HuJintao re-elected as general secretary of theChinese Communist Party. However, socialtensions and inequalities between urban andrural areas represent serious risks. Nonethe-less, in the short term, the government is

likely to hold them in check. Governancemoreover still presents major deficiencies.Recent measures to combat corruption haveyet to contribute to a significantimprovementin the business climate.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 10.0 10.1 10.4 11.1 11.5 11.0Inflation (%) 3.2 2.4 1.6 2.8 5.1 3.5Public sector balance (%GDP) -2.2 -1.3 -1.2 -0.7 -1.1 -1.0Exports 438.3 593.4 762.5 969.7 1222.0 1470.0Imports 393.6 534.4 628.3 751.9 901.0 1080.0Trade balance 44.7 59.0 134.2 217.7 321.0 390.0Current account balance 45.9 68.7 160.8 249.9 380.0 460.0Current account balance (%GDP) 2.8 3.6 7.2 9.4 11.3 11.0Foreign debt (%GDP) 12.7 12.8 12.5 12.2 10.6 9.2Debt service (%Exports) 4.7 3.1 2.9 2.3 1.8 1.7Foreign exchange reserves (in months of G&Simports)

10.4 11.7 13.3 14.4 15.6 17.0



■ Means of entryChina has opened up its market considerablyfollowing WTO accession in 2001. Most non-tariff barriers have been abolished. In thespace of just four years, the average customstariff has been lowered from 14 to 9.9 percent. In 2004, the import–export sector wasopened to all Chinese law companies, includ-ing foreign-held ones, and all remainingrestrictions on retailing were lifted. Yet,market access continues to be impeded by allsorts of obstacles. Restrictive and often dis-criminatory health and technical standardsremain in place for a number of importedproducts (foodstuffs, cosmetics, etc). A safetycertification system (CCC) complicates andmarks up the import of vehicles, electricalappliances and electronic goods.

■ Attitude towards foreign investorsFrom the very outset in the 1990s, China hasbeen tremendously successful in attractingFDI. From a quantitative standpoint, Chinareceived a massive US$69 billion of invest-ment inflows in 2006, making it the fifth

largest recipient of FDI. From a qualitativestandpoint, WTO accession has helped openup new sectors. While FDI remains prohib-ited in basic postal services, air traffic controland the media, sectors such as telecommu-nications, construction, town gas and watersupply, tourism and finance have beenopened up. Every FDI scheme is subject togovernment approval. The tierofgovernmentat which approval is required – municipal,provincial or central – is determined by thevolume of investment. The preferred vehiclefor FDI is the foreign investment enterprise(FIE) which is eligible for tax incentives.These, nevertheless, will be abolished undertax reforms that come into force in 2008,accompanied by a five-year transition period.The country has also seen a flurry of acqui-sitions (US$8 billion in 2005 alone, ie thesame amount as that between 1999 and2002). It should be noted that land is theproperty of the state and may be acquiredonly on leasehold (50 years for an industrialplant). In principle, FIEs must hire locallabour, but they do employ foreigners on anexceptional basis. The statutory working

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week is 40 hours. Paid leave varies from 5 to15 working days per year. China does not yethave a unified social welfare system.

■ Foreign exchange regulationsThe yuan is freely convertible only for ordi-nary business transactions. Foreignexchange regulations were eased in July2005 and the currency re-valued by 2 percent against the dollar. While the yuan’s peg

to the dollar has since been officiallyscrapped, the currency has appreciated byonly 8.8 per cent due to the central bank’sfirmly interventionist policies. At 5 Novem-ber 2007, the exchange rate was RMB7.45 tothe dollar. At the same time, the Chinesecurrency has depreciated by 7.2 per centagainst the euro. The government, neverthe-less, intends to pursue the yuan’s apprecia-tion in a gradual and moderate manner.

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OPPORTUNITY SCOPE



Mn USDMn USD


USA JapanHong Kong SouthKorea

Germany SouthKorea

Japan USA MalaysiaGermany

EXPORTS by products■ Machinery and transport equipment 46%■ Textiles and clothing 15%■ Electrical machineries 11%■ Chemicals 5%■ Other manufactured products 16%■ Other 8%

■ Machinery and transport equipment 22%■ Electrical machineries 22%■ Chemicals 12%■ Petroleum 11%■ Ores and metals 8%■ Foodstuffs and agricultural raw materials 7%■ Other 18%

IMPORTS by products

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Hong KongPopulation (million inhabitants): 7.0GDP (US$ million): 189,798


STRENGTHS• Hong Kong has benefited from China’s

growth via an influx of tourists andstrong demand for services thatrepresent 92 per cent of the territory’sGDP.

• The banking system is solid and verytransparent.

• Good governance and an efficientprudential regulatory system inheritedfrom anglo-saxon law constitute majorcompetitive advantages in Asia.

• Hong Kong boasts quality infrastructureincluding the world’s second largestcontainer port, a key aviation hub forAsia, and the world’s second largestcargo airport.

• The ‘one country, two systems’ principleshould endure considering thecomplementarity of the Chinese andHong Kong economies.

WEAKNESSES• Increasingly integrated with Continental

China, the economy is becomingvulnerable to economic reversals andChinese policy changes.

• Industry has completely been relocatedto Continental China.

• Mainland China has begun to competewith Hong Kong in services.

• Almost half of fiscal revenues are linkedto the property sector, which constitutesa source of vulnerability.

• Despite growing inequality in theterritory, introduction of a minimumwage or a redistribution system isunlikely.

• Pressure exerted by segments of thepopulation for democratisation of theterritory has affected relations withBeijing.

RISK ASSESSMENTEconomic growth has been slowing due toless dynamic foreign demand, particularlyfrom the United States. Foreign tradeshould thus contribute only 0.2 points ofgrowth in 2008 against 5.7 points in 2006.Several factors could, however, mitigate theimpact of the American slowdown, includinga household consumption recovery buoyedby the decline of interest rates, low un-employment and a wealth effect associatedwith rising stock market and propertyprices. In this context, the payment ex-perience registered by Coface has been sat-isfactory. Only very sparse information may

be available, however, on the accounts ofunlisted companies, which have no obli-gation to publish financial statements. Butthe debt collection possibilities availablethrough an effective legal system compen-sate for that shortcoming.

The trade deficit grew wider in 2007 underthe combined effect of strong domestic de-mand and a goods export slowdown. And thedeterioration should intensify in 2008. Thecurrent account surplus should thus alsoshrink in 2008. But it will remain at a goodlevel, thanks to the growth of services ex-ports. The Hong Kong dollar should remainpegged to the US dollar in 2008.

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The public sector balance should remain insurplus in 2008, thanks to the dynamism ofdomestic demand. Bolstered by those sur-pluses, the government should go forwardwith their infrastructure enhancement pro-gramme intended to allow Hong Kong to re-tain a dominant trade-transitposition inAsia.

In the political arena, Donald Tsang hasjust won re-election to a third five-year termas chief executive. He will have to contendwith various demonstrations by democratsseeking to institute direct universal suffrage.Any voting system reform would, however,necessitate assent from Beijing.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.2 8.6 7.5 6.9 6.1 4.7Inflation (%) -1.9 0.3 1.4 2.3 3.1 3.7Public sector balance (%GDP) -3.3 1.7 1.0 1.6 1.9 2.3Exports 224.7 260.3 289.5 317.6 353.3 386.7Imports 230.4 269.6 297.2 331.7 371.3 409.8Trade balance -5.7 -9.3 -7.7 -14.1 -18.0 -23.1Current account balance 16.6 15.8 20.1 20.5 20.0 13.7Current account balance (%GDP) 10.5 9.5 11.3 10.8 9.9 6.3Foreign debt (%GDP) 37.9 41.2 41.0 38.4 37.4 37.4Debt service (%Exports) 1.8 2.1 2.2 2.3 2.1 1.9Foreign exchange reserves (in months ofimports).

4.8 4.2 3.7 3.4 3.1 2.9



■ Means of entryHong Kong has built its reputation on theeffectiveness and transparency of its free-trade legislation and regulations. It is un-questionably the most open market in Asiaand one of the most open in the world, evenin the field of government procurement.HongKong’s new status as a Special Administra-tive Region following its return to China on1 July 1997 has allowed it to keep itstraditional economic and legal system. HongKong’s return has therefore not affected itsopenness to international trade. It has alsoremained a free port. There are no customsduties and indirect taxes are levied on only asmall number of products, such as cigarettes,wines and spirits, fuel and cars. Non-tariffbarriers are a rarity. A few foodstuffs requirea health certificate. For most imports, theonly requirement is an import declaration.In some cases, it is possible to make amonthly declaration, rather than one foreach shipment. The territory’s standards arein line with or similar to international

standards. It is the second largest financialcentre after Tokyo and boasts a highlyinternationalised banking sector. Trade iswell regulated and all customary paymentinstruments are used.

■ Attitude towards foreign investorsThe territory’s free-trade principles, inher-ited from the British, are upheld by thegovernment of the Administrative Regionwithout interference from mainland Chinain the territory’s legal,financialandeconomicaffairs. In keeping with its free markettraditions, Hong Kong does not place anyrestrictions on the activities of foreign inves-tors. There are no prior notification or ap-proval formalities, but by the same tokenthere are no government incentives or sub-sidies for foreign investors. On the ground,local monopolies have succeeded in drivingout foreign competitors. In the absence of acompetition law, the authorities only inter-vene when distortions damage consumerinterests. The legal system is simple andcompany incorporation formalities rapid.Tax laws too are simple and tax rates fairly

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low. The marginal rate of income tax is 16per cent since 1 April 2004, and corporationtax is 17.5 per cent since 1 April 2003. Inaddition, the Hong Kong government hasannounced additional tax reductions for theyear 2007/2008: income tax is to be loweredto 15 per cent and corporation tax to 16.5 percent. After a period of work permit restric-tions, the rules have been relaxed since 15May 2006 to allow dependants of work andinvestment permit holders to work and studywithout undergoing any formalities. The end

of the deflationary period since 2004 hasbeen marked by a sharp rise in propertyprices and wages. Potential investors there-fore face high start-up costs.

■ Foreign exchange regulationsThere are no exchange controls and the HongKong dollar is fully convertible. The currencyis pegged to the US dollar within a band ofHKD7.75–7.85 to the US dollar. This rate isguaranteed by a Currency Board Systemwhich automatically links Hong Kong’s for-eign exchange reserves to the monetary base.


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WORLDHong-Kong

ASIA

262

OPPORTUNITY SCOPE



Mn USDMn USD


China JapanUSA Germany UK JapanChina Singapore Korea,Rep

USA

EXPORTS by products■ Textiles and clothing 42%■ Electronic goods 17%■ Machinery 12%■ Pearls and precious stones 6%■ Plastics 4%■ Other 19%

■ Raw materials and semi-manufactured goods 35%■ Capital goods 27%■ Consumer goods 20%■ Fuels 10%■ Foodstuffs 8%■ Other 1%

IMPORTS by products

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Indicators Hong Kong Regional averageEmergingcountry average


INDIA

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IndiaPopulation (million inhabitants) 1,109.8GDP (US$ million) 906,267


STRENGTHS• Private Indian companies have been

India’s main asset, benefiting fromadvantages in many sectors, bothservices (IT, outsourcing) and industry(pharmaceuticals, automotive, textilesand so on).

• Economic growth has been balanced,driven at once by investment, exportsand rapidly developing middle classconsumption.

• The substantial increase in the savingsrate in recent years has facilitated thefinancing of corporate investment.

• India has moderate foreign debt andcomfortable foreign exchange reserves.

WEAKNESSES• Despite some real progress, the public

sector financial situation continues to beIndia’s main weakness, with debt servicedraining a high proportion of fiscalrevenues to the detriment ofdevelopment spending.

• There are thus major shortcomings ininfrastructure, which constitute India’smain economic bottleneck.

• The rapid rise of private company debtwill bear watching.

• Rural areas, which represent a majorityof the electorate, have not benefited fromcurrent economic growth.

RISK ASSESSMENTIndia achieved a new record for growth, up9.4 per cent, in the 2006–2007 fiscal year.Although a very moderate slowdown hasdeveloped since, the economy has nonethe-less remained strong with 9 per cent growthstill expected in 2008–2009 and over 8 percent in 2008–2009. Both industry and serv-ices have been driving the growth. In theseconditions, the Coface payment incident in-dex has remained below the world average.It nonetheless continues to be very difficultto obtain financial information for mid-sizecompanies or consolidated financial state-ments for groups.

Signs of overheating – a moderate deteri-oration of external accounts and persistentinflation – bear watching. The influx of long

capital has, however, covered external fi-nancing needs. Economic growth will besustainable since it rests on good fundamen-tals – high savings and investment rates andreasonable external debt ratios. The enor-mous infrastructure and education needsnonetheless continue to be veritable eco-nomic bottlenecks preventing growth fromreaching optimal levels. But the public sectordebt service burden, still representing overone-third of fiscal revenues, has impeded thenecessary public investment.

Forthcoming elections, which musttake place by May 2009, could affect thepace of the reform programme, sponsoredcurrently by a very disparate coalition ofparties. The reform process seems nonethe-less irreversible.

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USD billions(*)[Query col. 7:Retained the header as per thesource file. Please check.]

2003/4 2004/5 2005/6 2006/7(e) 2007/8(f) 2008/9(f)

Economic growth (%) 8.5 7.5 9.0 9.4 9.0 8.5Inflation (%) 4.8 5.3 3.9 6.5 4.8 4.0Public sector balance (%GDP) −9.1 −7.6 −7.3 −6.0 −5.4 −5.2Exports 66.3 85.2 105.2 127.1 149.5 177.8Imports 72.0 107.0 141.3 172.8 206.0 240.7Trade balance −5.7 −21.8 −36.1 −45.7 −56.6 −62.9Current account balance 14.1 −2.5 −9.2 −9.6 −15.0 −14.9Current account balance (%GDP) 2.3 −0.4 −1.1 −1.1 −1.3 −1.1Foreign debt (%GDP) 21.2 20.0 18.4 19.6 18.0 17.1Debt service (%Exports) 13.2 8.2 8.0 5.1 5.2 5.4Foreign exchange reserves (inmonths of imports)

12.4 10.5 8.5 9.1 9.3 9.0

*Financial year starting 1 April, e = estimate, f = forecast


■ Means of entryCustoms duties in India remain steep andvary considerably between products. Duty onindustrial goods is generally around 14.9 percent, but peaks of 40 per cent or more are notrare. Cars, for example, are liable to 100 percent duty. The average rate of duty on farmproducts is 56 per cent. However, duties onwine and spirits vary between 140 and 300per cent, with each state setting theiramount. The duty on consumer goods fluctu-ates between 15 and 37 per cent. On theother hand, some products considered essen-tial to the country’s economic developmentbenefit from reduced rates of duty (around 5per cent). These include machinery andintermediate goods for the textiles industryand IT sector, some uncut gems, drinkingwater purification equipment for public-sec-tor projects and non-ferrous raw materials.Under arrangements concluded with theWTO, India should lower customs dutiesoverthe next few years. But complex non-tariffbarriers not only remain in place, but alsohave multiplied since the abolition of quan-titative restrictions on 1 April 2001. Eachshipment of imported foodstuffs is, in princi-ple, subject to methodical inspection. Moreo-ver, pre-packaged goods must mention the

maximum retail price (including local taxesand transport costs) on their label prior toshipment. Finally, numerous importers areplaced at a disadvantage by the ad hoc dutieslevied on some goods under the technicalcertification rules of the Bureau of IndianStandards, as well as by the requirement toopen a subsidiary or liaison office.

■ Attitude towards foreign investorsIn contrast to its post-independence policy ofeconomic self-sufficiency, since 1991 Indiahas opened up its economy to foreign invest-ment mainly via the adoption of a ’negativelist’ of sectors under which automatic FDIapproval is the norm. Some obstacles survive.While a series of relaxation measures haveseen the number of manufactured goodsreserved for local small industry cut from836 in 1989 to 114 today, various sectors aresubject to ceilings on foreign shareholdings,with multi-brand retailing still closed toforeign investors. A foreign company alreadybased in India via a joint venture may notopen a subsidiary with another partner inthe same sector without the written consentof its Indian partner. While in a recent movethis rule has been relaxed for new agree-ments (provided it is specified therein by theparties), it continues to apply to existingagreements. Corporation tax for foreign law

INDIA

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companies is 42.2 per cent, compared with34 per cent for Indian companies. Indirecttaxation remains both complex and opaque.Nevertheless, the reform programme contin-ues apace under the present government, asunder the previous one, with the focusprimarily on higher ceilings for foreign in-vestment in the few remaining sectors con-

cerned (eg opening of retail sector tosingle-brand international companies), theestablishment of a foreign investment com-mission, greater transparency in approvalprocedures for foreign investment, adapta-tion of intellectual property legislation andgreater capital account openness.


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WORLDIndia

ASIA

266

OPPORTUNITY SCOPE



Mn USDMn USD


USA ChinaUAE Singapore HongKong

USAChina Singapore BelgiumAustralia

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%

■ 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%

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Indicators India Regional averageEmerging

country average

GNP per capita (PPP dollars) 3,800 5,929 5,983GNP per capita (USD) 820 1,814 2,313Human Development Index 0.611 0.683 0.672Wealthiest 10% share of national income 31 32 31Urban population percentage 29 37 44Percentage under 15 years old 32 28 30Number of computers per 1,000 inhabitants 16 42 50

INDONESIA

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IndonesiaPopulation (million inhabitants): 231.9GDP (US$ million): 364,459


STRENGTHS• The banking sector has grown stronger.• Indonesia is endowed with extensive

natural wealth including agricultural,energy and mining resources.

• The country has demonstrated greaterpolitical stability.

• Implementation of structural reforms,particularly labour market and taxreforms, has contributed to improvingthe climate of confidence and enhancingthe country’s attractiveness.

• The new investment law of March 2007has clarified the rules regulating FDIand established a more transparentsystem for arbitration of disputesbetween residents and non-residents.

WEAKNESSES• The investment rate is still low due to

institutional shortcomings and limiteddevelopment of bank intermediation.

• A lack of infrastructures causesbottlenecks and undermines Indonesia’sdevelopment.

• A rigid labour market and a bloatedbureaucracy hamper companies that lackflexibility.

• Corruption and the lack of transparencyremain major deficiencies in the businessclimate.

• The unemployment and poverty ratesremain high.

RISK ASSESSMENTIndonesia is currently in a strong growthphase – up 6.2 per cent in 2007 – thanks tobuoyant domestic demand and dynamic ex-ports, especially to China. With the rise of oilprices, however, inflationary pressures willincrease this year. Monetary policy will thustighten and slow the economy slightly inconsequence. Growth will nonetheless re-main buoyant, up 5.8 per cent. In this context,the Coface payment incident index remainedbelow the world average in 2007. Corporatetransparency nonetheless constitutes a per-sistent weakness, with company accountsrarely available and not very reliable whenthey are. Moreover, corruption problemsremain serious and the legal system is stillslow and costly.

The easing of sovereign risk is evidencedby the reduction of public sector debt from 98per cent of GDP in 2000 to 36 per cent in2007. Although growing, the fiscal deficit willremain at reasonable levels in 2008 belowtwo per cent of GDP. The external positionhas also been improving. Indonesia repaidits debt to the IMF in full end 2006. Anexport slowdown, especially of gas and oil,and strong import growth spurred by thestrong domestic demand could, however,cause the current account surplus to shrinkin 2008. This decline notwithstanding, theinflux FDI and portfolio investment shouldnonetheless enable the country to build upforeign exchange reserves, which shouldreach a level representing 5.4 months ofimports in 2008, a respectable achievement

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albeit well below the 11-month Asian aver-age. The banking sector has grown strongermeanwhile with profits higher and the pro-portion of non-performing loans in decline.State-owned banks of questionable solvencyand risky lending policy are nonetheless stillnumerous.

The political situation has improved mean-

while with peace restored in the formerseparatist province of Aceh. And PresidentYudhoyono is widely credited in Indonesiawith effectively managing various shocks,natural catastrophes as well as attacks. Hispopularity has thus been high midwaythrough his term in office with the nextelections scheduled for 2009.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.9 4.9 5.7 5.5 6.2 5.8Inflation (%) 5.1 6.4 17.1 6.6 6.5 8.0Public sector balance (%GDP) -1.7 -1.0 -0.5 -0.9 -1.5 -1.7Exports 64.1 70.8 87.0 103.5 115.9 129.5Imports 39.5 50.6 69.5 73.9 86.5 98.5Trade balance 24.6 20.2 17.5 29.6 29.4 31.0Current account balance 8.1 1.6 0.2 9.9 8.7 8.8Current account balance (%GDP) 3.4 0.6 0.1 2.7 2.1 1.9Foreign debt (%GDP) 57.6 53.3 45.5 35.5 32.9 30.1Debt service (%Exports) 30.8 26.2 19.2 17.4 17.1 13.7Foreign exchange reserves (in months ofimports).

6.8 5.2 3.9 4.5 5.1 5.4



■ Means of entryIndonesia pursues a liberal trade policy andsince the Marrakech agreement has gradu-ally dismantled customs duties. Seventy-twoper cent of tariff items are liable to 0–5 percent duty. There are tariff peaks for importedcars, iron and steel, certain chemicals andwines and spirits. At the same time, Indone-sia is gradually lifting non-tariff barriers onall items except priority products such as riceand sugar. However, a number of items, suchas consumer goods, require a licence orcertificate to be released on the market.Moves to liberalise trade in line with WTOcommitments have been backed by measuresto open trade further with the country’sASEAN partners. AFTA aims to cut dutieson manufactured goods to within a 0–5 percent band.

■ Attitude towards foreign investorsA new investment act introduced in March2007 further opens the country to foreign in-

vestment. Badan Koordinasi PenanamanModal (BKPM), the government investmentpromotion and coordination agency, hasgained more powers by being directly at-tached to the president’s office. The govern-ment is keen to boost declining foreigninvestment after years of crisis. It regardsFDI as vital for technology transfer and jobcreation. Indonesia has signed binding in-vestment protection and safeguards agree-ments with 56 countries. The agreementwithFrance is due to be renegotiated this year.The country’s economic situation does not al-low it to grant extremely attractive tax incen-tives, except for companies operating in alimited number of priority free zones such asBatam Island facing Singapore. There is tem-porary tax relief for raw materials and pri-mary machinery purchased by foreignmanufacturing companies. Foreign investorsmay repatriate profits upon payment of localtax. Despite the initiatives announcedbysuc-cessive governments to simplify start-ups inIndonesia, the investment approval proce-

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dure adopted by BKPM remains long-windedand tedious. Projects in the banking, finan-cial services and insurance sectors are over-seen by the Ministry of Finance, whereasthose in mining and oil and gas are the re-sponsibility of the Ministry of Energy. The

negative list – which bars foreign investorsfrom a limited number of sectors and activi-ties or regulates access to sectorsdeemedsen-sitive by the government – was revised inJuly.


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WORLDIndonesia

ASIA

270

OPPORTUNITY SCOPE



Mn USDMn USD


Japan USASingapore SouthKorea

Singapore JapanChina USA SaudiArabia

China

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%

■ Fuels 31%■ Machinery 12%■ Foodstuffs 8%■ Chemicals 6%■ Electrical and electronic equipment 5%■ Iron and steel 5%■ Agricultural raw materials 4%■ Other 30%

IMPORTS by products

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JAPAN

271

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JapanPopulation (million inhabitants): 127.8GDP (US$ million): 4,364,100


STRENGTHS• A marked geographic adjustment of

exports has reduced Japan’s dependenceon the United States.

• The current transactions surplus rests onthe competitiveness of export industriesin the car industry and electronics.

• Restructuring has allowed large banksand companies to consolidate theirfinances.

• R&D spending constitutes a strategiccomponent of corporate medium-termindustrial policy.

WEAKNESSES• The rapid ageing of the population has

made public finance consolidation acrucial priority.

• Privileged ties between the political, civilservice and entrepreneurial worlds haveimpeded reforms.

• Social inequalities and regionaldisparities have tended to exacerbatehousehold skittishness.

• The proportion of irregular workers hasundermined wage growth.

• Small and medium-sized companies areconcentrated mainly in the servicessector where productivity gains havebeen limited.

RISK ASSESSMENTA slight rebound in household consumptionnotwithstanding, economic growth slowed in2007 as did exports and corporate invest-ment. The stiffening of anti-seismic stan-dards severely disrupted the residentialconstruction sector, delaying delivery ofbuilding and works permits.

The economy will weaken further in 2008.The yen appreciation in conjunction with amore pronounced North American economicslowdown will continue to hamper, nonethe-less, strong export growth. Companies willhave difficulty remaining price competitivewith the rising prices of energy and certainraw materials squeezing their margins. Inthis context, they will remain vigilant oninvestment policy and hiring. Despite theshortage of skilled labour, wages should thusregister only moderate increases; which will

limit the growth of consumption (56 per centof GDP). Problems linked to property invest-ment will only be reabsorbed gradually.Households will cut back on spending as theycontend with surging prices for energy andfood products. Despite upward pressure onimported goods, consumer prices should onlyincrease slightly with the risk of deflationcontinuing to overhang the Japanese econ-omy. The fiscal deficit and public debt willremain at record levels with tax revenueslikely to be flat amid the economic slowdown.Measures essential to improvement in publicsector finances, including increases in VATon consumption will likely be postponedagain pending the next parliamentary elec-tions in 2009.

Japanese companies are generally in goodfinancial health with a high rate of profit(about 11 per cent of GDP), high cash flow,

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and recourse to borrowing in steady declineas they continue to reduce nonetheless, stillhigh debt (95 per cent of GDP). Reflectingthat favourable situation, the Coface pay-ment incident index has been below theworld average. Companies should thus, notsuffer from a credit crunch. These statisticaldata, particularly applicable to large manu-facturing companies, tend to mask the realityfaced by smaller companies, which have been

experiencing increasing difficulties particu-larly when located outside major metropoli-tan areas and operating exclusively in thedomestic market. Bankruptcies, after declin-ing the past four years have begun to increaseagain. Operators in a range of sectors willthus bear particularly close watching: con-struction, property, wholesaling, hotel-cater-ing and consumer electronics.


% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 1.4 2.7 1.9 2.2 1.9 1.7Consumption (var.) 0.3 1.5 1.5 0.9 1.6 1.1Investment (var.) 4.4 5.6 6.6 7.4 2.2 2.4Inflation −1.6 −1.1 −1.3 0.2 0 0.2Unemployment 5.3 4.7 4.4 4.1 3.8 3.7Short-term interest rate 0.0 0.0 0.0 0.2 0.7 0.6Public sector balance (%GDP) −8.0 −6.3 −5.3 −4.6 −4 −4.2Public sector debt (%GDP) 154.0 156.0 169.4 176.3 179.5 182.4Exports (var.) 9.2 14 6.9 9.6 6.8 5.2Imports (var.) 3.9 8.1 5.8 4.5 3.4 4.5Current account balance (%GDP) 3.1 3.7 3.6 3.9 4.7 4.8



■ Car industryPassenger car production will remain strongthis year despite erosion of domestic saleswith consumers obliged to bear exorbitantcosts linked to vehicle ownership. Exports(54 per cent of local production) will onlysuffer marginally from thedemandslowdownin the United States and the yen apprecia-tion. To mitigate exchange rate risk carmak-ers will continue to invest in Asia and LatinAmerica. Toyota will remain far ahead of thepack in its home market with 46 per cent ofproduction in 2008.

■ SteelLocal production, although slowing slightlyin 2008, will continue to enjoy a competitiveadvantage on the quality of products in-tended for shipbuilding and the car industry.The activity of Japanese companies willremain buoyant thanks to still strong re-gional growth, even with continuing stiff

competition abroad from producers in emerg-ing regions. The marked slowdown of importsfrom China has strengthened the position ofJapanese operators.

■ ConstructionResidential investmentwill remainindeclinein 2008, with the delays indeliveringbuildingpermits resulting from the stiffening of se-curity standards only coming down progres-sively. Public works will continue to sufferfrom the deep spending cuts made by publicinstitutions, which will particularly affectregional operators. Private non-residentialconstruction will suffer from the prudenceexercised by companies on investing.

■ Consumer electronics and home appliancesStandardized production transfers to emerg-ing Asia will continue. The fierce competitionraging among a large number of players inthe consumer electronics sector will pushprices down even further. Only high value-added products like plasma and liquid-crys-

JAPAN

273

3

tal screens and DVD players will achievegood growth.

■ Mass distributionHousehold consumption should show littlegrowth in 2008, which will particularlyweaken supermarkets and departmentstores: the Wal-Mart subsidiary Seiyu super-markets will stay in the red while theconcentration process will continue amongdepartment stores exemplified by the FrontRetailing Group created by Daimaru andMatsuzakayu. Other players like Seven & IHoldings or, the number two, Aeon willdiversify, notably by setting up financialstructures capable of providing consumercredit services to customers.


■ PaymentJapan has ratified the International Conven-tions of June 1930 on Bills of Exchange andPromissory Notes and of March 1931 onCheques. As a result, the validity of theseinstruments in Japan is subject to the samerules as in Europe.

The bill of exchange (kawase tegata) andthe much more widely used promissory note(yakusoku tegata), when unpaid, allow cred-itors to initiate debt recovery proceedings viaa fast-track procedure, subject to certainconditions. Although, the fast-track proce-dure also applies to cheques (kogitte), theiruse is far less common for everyday transac-tions.

Clearing houses (tegata kokanjo) play animportant role in the collective processing ofthe money supply arising from these instru-ments. The penalties for payment default actas a powerful deterrent. A debtor, who failstwice in six months to honour a bill ofexchange, promissory note or cheque collect-able in Japan, is barred for a period of twoyears from undertaking business-relatedbanking transactions (current account,loans) with financial establishments at-tached to the clearing house. In other words,the debtor is reduced to a de facto state ofinsolvency.

These two measures normally result in thecalling in of any bank loans granted to the

debtor. Bank transfers (furikomi) have de-veloped greatly throughout the economy inrecent decades thanks to widespread use ofelectronic systems in Japanese banking cir-cles.

Various highly automated inter-banktransfer systems are also available for localor international payments, like the ForeignExchange Yen Clearing System (FXYCS,operated by the Tokyo Bankers Association)and the Bank of Japan Financial NetworkSystem (BOJ-NET) Funds Transfer System(operated by Bank of Japan). Payment madevia the Internet site of the client’s bank isalso increasingly common.

■ Debt collectionIn principle, to avoid certain disreputablepractices employed in the past by specialisedcompanies, only lawyers (bengoshi) may un-dertake debt collection. However, the law of16 October 1998, which came into force on 1February 1999, established the profession of“servicer” to foster debt securitisation andfacilitate collection of non-performing loans(NPL debts) held by financial institutions.

Servicers are debt collection companieslicensed by the Ministry of Justice to providecollections services, but only for certain typesof debt: bank loans, loans by designatedinstitutions, loans contracted under leasingarrangements, credit card repayments andso on. Out-of-court settlement is alwayspreferable and involves obtainingasignaturefrom the debtor on a notarised deed thatincludes a forced-execution clause, which, inthe event of continued default, is directlyenforceable without requiring a prior courtjudgement.

The standard practice is for the creditor tosend debtor a registered letter with acknowl-edgement of receipt (naıyo shomeı), thecontent of which must be written in Japanesecharacters and certified by the post office.The effect of this letter is to set back thestatute of limitation by six months (which isfive years for commercial debts). If the debtorstill fails to respond, the creditor must startlegal action during that period to retain thebenefit of interruption of the limitationperiod.

ASIA

274

Summary proceedings intended to allowcreditors to obtain a ruling on payment(tokusoku tetsuzuki), applies to uncontestedclaims and effectively facilitates obtaining acourt order to pay (shiharaı meireı) from thejudge within six months. Court fees, payableby the claimant in duty stamps, vary accord-ing to the size of the claim. If the debtorcontests the order within two weeks of serviceof notice, the case is transferred to ordinaryproceedings.

Ordinary proceedings are brought beforethe ‘summary court’ (kan-i saibansho) forclaims under JPY 1,400,000 and before the‘district court’ (chiho saibansho) for claimsabove this amount. Those proceedings, con-sisting of written and oral submissions, cantake from one to three years and generatesignificant legal costs. Court fees, payable induty stamps, depend on the size of the claim.

With the 1 January 1998 revision of the

civil procedure code undertaken to reducethe duration of legal procedures, the newamendment adopted on 1 April 2004 isnotably intended to speed up submission ofevidence to both the adverse party and judgeduring the preliminary examination phase.

The importance attached to conciliationrepresents the chief characteristic of theJapanese legal system. Under a conciliationprocedure (chotei) – conducted under courtsupervision – a panel of mediators usuallycomprises a judge and two assessors, at-tempts to resolve civil and commercial dis-putes amicably. While avoiding lengthy andcostly legal proceedings, any transactionobtained through such conciliation becomesenforceable once approved by the court.

Similarly, disputes can be resolved viaarbitration (chusai), an approach well appre-ciated locally and not involving excessiveformalism.


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LAOS

275

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LaosPopulation (million inhabitants): 5.8GDP (US$ million): 3,404


RISK ASSESSMENTThe strong growth posted in 2007 shouldstay on track in 2008 underpinned by devel-opment of the mining (copper and gold) andhydroelectricity sectors. The natural re-sources of that landlocked country are ofparticular interest to its dynamicneighbours:Vietnam, Thailand and China. Thanks toinvestments in infrastructure and the hydro-electricity sector with the building of theNam Theun 2 Dam, the constructionindustryhas outperformed. Poverty should continueto decline in this context. There are nonethe-less persistent weaknesses. Services, partic-ularly financial, and the manufacturingsector remain underdeveloped. Eliminationin 2008 of the European safeguard measures,which had limited imports of Chinese tex-tiles, could affect Laotian exports. The agri-cultural sector, which provides a livelihoodfor 80 per cent of the population, still lackscompetitiveness.

Sovereign risk, meanwhile, although stillhigh has improved. The public sector deficitand public foreign debt declined in 2007. The

debt service ratio has, however, weighed onfiscal revenues, which have been flat. Imple-mentation of tax reforms has been lagging asevidenced by the postponement of the appli-cation of VAT. The gradual reduction ofcustoms duties resulting from the country’smembership in ASEAN and NAFTA couldlead to further widening of the fiscal deficit.

The current account deficit widened in2007 due mainly to imports of constructionmaterials and machinery for projects in themining and hydroelectricity sectors. A sub-stantial influx of foreign direct investmenthas partly covered the country’s financingneeds. The still-low level of foreign exchangereserves has a destabilising effect on theexchange rate. The banking system remainsunderdeveloped and strained by non-per-forming loans.

In the political arena, the country hasenjoyed domestic stability and good relationswith its neighbours. In governance terms,Laos has one of the poorest records in Asiawhile the economy’s increasing dependenceon exports of natural resourceshashamperedits development and consolidation.

ASIA

276


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.1 6.4 7.1 7.6 7.1 7.6Inflation (%) 15.5 10.5 7.2 6.8 4.0 4.5Public sector balance (%GDP) –5.6 –3.4 –4.4 –3.7 –1.3 –0.6Exports 450 500 646 996 1,009 1,198Imports 694 977 1,206 1,384 1,896 2,113Trade balance –244 –477 –560 –388 –887 –915Current account balance (%GDP) –8.2 –14.3 –20.2 –13.3 –22.9 –21.1Foreign debt (%GDP) 89.1 83.2 77.1 69.0 63.0 56.9Debt service (%Exports) 6.3 7.1 7.5 3.7 6.1 6.5Foreign exchange reserves (in months ofimports)

3.2 3.0 2.8 3.6 4.3 4.5


MALAYSIA

277

3

MalaysiaPopulation (million inhabitants) 25.7GDP (US$ million) 148,940


STRENGTHS• The country exports both manufactured

products and raw materials such as oiland palm oil.

• The services sector keeps growing andnow generates two-thirds of GDP growth.

• Malaysia boasts an effective educationsystem and the infrastructure to supportlong-term growth.

• Efforts made to promote training andtechnological development have fostereda more competitive economy.

• Recent reforms have spurreddevelopment of the financial market andfacilitated foreign direct investment.

• Tax reforms have introduced investmentincentives like income tax exemptions fordividends and income tax breaks forcompanies 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 ofpublic sector revenues – a decline inprices or production would put publicfinances at risk.

• Despite positive discrimination policyregional disparities persist to thedetriment of the Malaysian majority.

• Although in gradual decline the stock ofbank credit granted to the private sectoris still among the largest in Asia.

• With labour costs twice those in Chinathe Malaysian economy’s pricecompetitiveness is being eroded.

RISK ASSESSMENTEconomic growth should remain very strongin 2007, driven by dynamic private invest-ment and especially by the strong growth ofprivate consumption. Inview of theslowdownexpected in the United States,whichprovidesa market for 20 per cent of Malaysianexports,growth could slow slightly in 2008. Theupward trend will nonetheless continue,thanks to the diversification of the economy.Besides the electronics sector, which repre-sents 53 per cent of exports, the retail trade,financial services, construction, tourism anda farm sector buoyed by high-raw materialprices have supported the growth. Asaresult,the Coface payment experience hasremainedgood and claim collection is effective. Un-

listed companies, however, only rarely pub-lish financial statements.

Malaysia enjoys a healthy financial situa-tion underpinned by an ample current ac-count surplus and high foreign exchangereserves. The banking sector continuesmore-over to grow stronger as evidenced by thedecline of the proportion of non-performingloans. Public spending is still high, however,which has resulted in an appreciable fiscaldeficit and public sector debt representingover 50 per cent of GDP. Sovereign risk hasnonetheless been limited due to the abun-dance of domestic savings.

With Prime Minister Abdullah Badawi’sthe United Malays National Organisation(UMNO) party having won by a large major-

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ity in two by-elections, in January and Aprillast year, he may decide to hold legislativeelections before the initially scheduled dateof April 2009 to take advantage of theopposition’s weakness and lack of cohesive-ness. Despite the emergence of a coalition of26 opposition groups and parties under thename Bersih, Malay for ‘clean’, the ability ofopposition parties to compete with UMNO is

still limited due to the heterogeneity of theirprogrammes. Only issues linked to gover-nance unite them. To foster improvements inthat area, they organise demonstrations, likethe one in November and December 2007 inKuala Lumpur, to protest against corruptionand the lack of independent judicialauthorityand to demand electoral reform before thegeneral elections take place.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.8 6.8 5.0 5.9 6.0 5.8Inflation (%) 1.0 1.5 3.0 3.6 2.1 2.6Public sector balance (%GDP) –5.0 –4.1 –3.6 –3.3 –3.2 –3.1Exports 105.0 126.6 141.8 160.8 169.9 187.6Imports 79.3 99.1 108.7 124.0 132.7 150.5Trade balance 25.7 27.5 33.2 36.8 37.2 37.1Current account balance 13.3 14.8 20.0 25.5 25.9 26.1Current account balance (%GDP) 12.1 11.9 14.6 16.3 13.8 12.5Foreign debt (%GDP) 44.6 42.3 37.8 33.8 28.5 26.3Debt service (%Exports) 6.3 4.6 5.2 4.5 4.1 2.3Foreign exchange reserves(in months of imports)

4.9 6.0 5.7 6.0 6.8 7.3



■ Means of entryA WTO member and signatory to the ASEANfree-trade agreement (AFTA), Malaysia pur-sues a free-trade policy. The average rate ofcustoms duty for all goods is below 8 per centand over 99 per cent of tariff lines bear 0–5per cent duty. AFTA rules require duties for99 per cent of tariff lines to be below 0.5 percent in respect of imports from the five otherfounding members of ASEAN (Brunei, Phil-ippines, Singapore, Indonesia and Thailand).Tariff peaks remain for cars, steel andalcoholic beverages. The Malaysian govern-ment regulates the import and export ofcertain goods (17 per cent of tariff lines)through automatic and non-automatic licens-ing. This procedure is not such a hindrancein practice, except in the automotive sectorwhere high customs duties, excise duties,quotas and pre-import compulsory licensingserve to protect local manufacturers.

■ Attitude towards foreign investorsThe government has introduced tax incen-tives to encourage the establishment of for-eign businesses (Pioneer Status, InvestmentTax Allowance, Regional DistributionCentreStatus, Operational Headquarters Status).Foreigners are allowed to wholly own manu-facturing, high-tech or industrial servicecompanies. Malaysia also runs an offshore fi-nancial site at Labuan in the east of the coun-try and 14 tax- and duty-free zones.

A positive discrimination policy aims toencourage greater participation by Bumipu-tras (mainly ethnic Malays who make up 60per cent of the population) in the develop-ment of the local economy. This policy ham-pers foreign investment in thenon-manufacturing services sector as well asin all commercial business with the state.Private-sector companies deemed non-Bum-iputra (or insufficiently Bumiputra) can findit difficult to contract with public-sectorenterprises.

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■ Foreign exchange regulationsOn 21 July 2005, Malaysia abandoned itsfixed exchange rate against the US dollar, inforce since September 1998, in favour ofcontrolled flotation. Currency transactionsare subject to central bank approval, whichcan be obtained easily. Local currency bor-rowings to purchase foreign exchange, which

contributed to the speculative movementsseen in 1997, continue to be tightly regulated.That is why the currency’s internationalisa-tion (assets in Malaysian ringgits held out-side Malaysia) is not on the agenda. Thisdoes not seem to affect business life in thecountry, which goes on regardless.


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WORLDMalaysia

ASIA

280

OPPORTUNITY SCOPE



Mn USDMn USD


USA JapanSingapore China Thailand SingaporeUSA China ThailandJapan

EXPORTS by products■ Electrical equipment 31%■ Machinery 20%■ Fuels 14%■ Animal and vegetable oils and fats 4%■ Rubber 3%■ Other 28%

■ Intermediate goods 70%■ Capital goods 14%■ Re-exports 7%■ Consumer goods 6%■ Dual-use goods 3%■ Other 2%

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MONGOLIA

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MongoliaPopulation (million inhabitants) 2.6GDP (US$ million) 2,689


RISK ASSESSMENTThe strong growth achieved in 2007 shouldstay on track in 2008, driven mainly by risinggold and copper prices, whose sales represent60 per cent of exports, mostly to China.Livestock breeding − employing 40 per centof the population − also performed well. Inthose buoyant economic conditions, house-hold income rose with that improvementbenefiting the construction,financialservicesand retail sectors.

There are nonetheless persistent weak-nesses. The preponderant role the miningsector plays in the economy is not withoutrisk, particularly if raw material prices beginto fall. And breeding is dependent on weatherconditions while manufacturing sectors havesuffered from a lack of competitiveness. Thegrowing difficulties experienced by thosesectors could have extensive social conse-quences in a country where 36 per cent of thepopulation lives below the poverty line.

Although declining, external debt ratiosare still above the emerging country average.

Mongolia has been running a currentaccountsurplus since 2004 and building up foreignexchange reserves that nonetheless also lagbehind the emerging country average. Thecountry’s external position has benefitedfrom foreign direct investment mainly in themining sector and by multilateral aid.

Public sector debt in relation to GDP wascut in half between 2003 and 2007. Expan-sionary fiscal policy contributed, however, tothe emergence of a fiscal deficit in 2007,which could widen in 2008 in the run-up togeneral elections in June.

In the political arena, divisions within thegovernment coalition have hampered reformimplementation. With governance shortcom-ing remaining the country’s Achilles’ heel,the climate of latent hostility in the countrycould moreover put off investors. After thedemonstrations against benefits granted toforeign investors, for example, the govern-ment buckled under the pressure and insti-tuted a new tax on mining profits.

ASIA

282


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.1 10.8 7.0 8.4 7.0 7.0Inflation (%) 4.7 10.6 9.2 7.0 5.0 5.0Public sector balance (%GDP) –4.2 –2.1 2.9 9.0 –2.0 –4.1Public sector debt (%GDP) 113 93 68.3 53.6 50.6 51.3Exports 627 872 1,065 1,529 1,635 1,912Imports 827 1,021 1,184 1,489 1,662 2,037Trade balance –200 –149 –119 40 –27 –125Current account balance (%GDP) –7.7 3.9 4.0 1.5 2.0 2.0Foreign debt (%GDP) 96.3 84.3 63.3 50.4 47.9 46.5Debt service (%Exports) 34.0 7.5 2.9 2.1 2.4 2.1Foreign exchange reserves (in months ofimports)

1.9 1.7 2.4 3.7 4.7 4.3


MYANMAR

283

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MyanmarPopulation (million inhabitants) 51.0GDP (US$ million) 14,722


RISK ASSESSMENTMyanmar’s military regime stood up to awave of protest in September 2007. Withsocial demands on the cost of living after newincreases in petrol and gas prices, politicaldemands were also put forward includingcompliance with the roadmap for democracyformally accepted by the junta, dialogue withthe opposition whose leader Aung San SuuKyi remains under house arrest and respectfor fundamental rights. Despite calls fornegotiations, the State Peace and Develop-ment Council launched violent repressivemeasures that prompted the United Statesand Europe to impose tougher sanctions andJapan to suspend bilateral aid. China andRussia remained aloof, however, due to theirclose economic ties. The sanctions will thushave limited impact on the economy. Therepercussions on the business climate will,however, be more severe with the politicaluncertainties compounding the concerns offoreign investors over the lack of transpar-ency and frequent legislative changes.

In this context, statistical data is not veryreliable. While the military junta announceddouble-digit growth, the IMF estimated it at5.5 per cent in 2007 with 4.0 per centexpectedin 2008. The gas and oil sectors should

continue to drive the economy in view of thehigh demand from Myanmar’s dynamic, en-ergy-consuming neighbours: Thailand, Indiaand China. Still dominated by commodities,the economy remains weak in this respect.Agriculture, which represents 40 per cent ofGDP, has not performed up to its potentialdue to administrative controls limiting har-vests. Lacking competitiveness and ham-pered by import prohibitions in the UnitedStates, industry is underdeveloped. The ex-tent of the informal economy and above allthe unpredictability of the junta’s economicpolicy have clouded the outlook. Myanmarthus remains the Asian economy most af-fected by poverty as evidenced by socialindicators that rank it lower than Laos orCambodia.

While the consolidation of external ac-counts certainly paved the way for a substan-tial increase in foreign exchange reserves,the public sector nonetheless continues torun a deficit entirely financed by moneycreation. Inflation has thus been out ofcontrol and has eroded purchasing power.Despite the consolidation of the bankingsector undertaken after the crisis in 2003–2004, intermediation remains very poor andprudential regulations underdeveloped.

ASIA

284


USD millions 2003/4 2004/5 2005/6 2006/7 2007/8(e) 2008/9(f)

Economic growth (%) 13.8 13.6 13.6 12.7 5.5 4.0Inflation (%) 8.0 7.7 12.6 38.7 35 20Public sector balance (%GDP) –5.4 –4.7 –3.3 –4.2 –3.8 –2.5Exports 2,781 2,902 3,531 5,163 5,833 5,983Imports 2,240 1,973 1,984 2,937 3,478 3,900Trade balance 541 929 1,547 2,226 2,355 2,083Current account balance (%GDP) –1.0 2.3 3.9 7.1 7.0 4.6Foreign debt (%GDP) 69.6 63.6 61.6 50.4 48.3 45.0Debt service (%Exports) 12.2 9.2 9.9 9.3 6.3 5.8Foreign exchange reserves (inmonths of imports)

4.2 5.3 6.2 8.3 11.6 13.4


NEPAL

285

3

NepalPopulation (million inhabitants) 27.7GDP (US$ million) 8,051


RISK ASSESSMENTEconomic growth remained sluggish in2006–2007, up 2.5 per cent, due to poor weatherconditions that undermined rice production.Political uncertainties moreover affectednon-farm activity with domestic demandonlygrowing, thanks to transfers by expatriateworkers. Private companies continue to suf-fer from a poor political and institutionalenvironment and frequent electric powerfailures.

Despite the restoration of democracy andthe conclusion of a peace treaty intended tobring 10 years of civil war to a close, the

political situation is still precarious. Accord-ing to the peace treaty, the Maoist rebelshave to put their combatants and weaponsunder United Nations control but the processhas been slow thus far. Achieving politicalnormalisation will require election of a con-stituent assembly acceptable to everyone.

With relatively healthy public sector fi-nances, moderate debt and especially greattourist potential, the Nepalese economicoutlook could ultimately improve. Politicaluncertainties and deficient infrastructurecontinue, however, to cloud this outlook.


USD millions(*) 2003/4 2004/5 2005/6(f ) 2006/7(e) 2007/8(f) 2008/9(f)

Economic growth (%) 4.7 3.1 2.8 2.5 4.0 4.5Inflation (%) 4.0 4.5 8.0 6.4 6.5 6.0Public sector balance (%GDP) –3 –3.2 –3.8 –3.6 –6.2 –5.0Exports 748 832 850 892 989 1,106Imports 1,801 2,022 2,372 2,653 3,011 3,342Trade balance –1,053 –1,190 –1,522 –1,761 –2,022 –2,236Current account balance (%GDP) 0.8 –0.2 0.6 –1.5 –2.2 –2.7Foreign debt (%GDP) 47.4 41.9 38.9 36.2 35.1 33.7Debt service (%Exports) 6.0 6.3 6.3 6.3 6.3 6.3Foreign exchange reserves (inmonths of imports)

7.9 7.2 7.4 7.1 6.7 6.4

*Financial year starting 15 July e = estimate, f = forecast

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New ZealandPopulation (million inhabitants): 4.1GDP (US$ million): 106,000


RISK ASSESSMENTDespite a second-half slowdown, a sharpgrowth rebound marked 2007 overall. House-hold consumption was driven by the stronggrowth of wages and farm incomes reflecting,respectively, a lack of available labour (withthe emigration of young graduates) andsoaring prices for dairy products. The dyna-mism of investment and prices in the residen-tial property sector provided additionalsupport. Companies, meanwhile, tookadvan-tage of the decline in prices for importedcapital goods fostered by the strength of theNew Zealand dollar to increase their invest-ment programmes. Public institutions havebeen able to further increase their spending,thanks to their excellent financial health.Exports alone remained sluggish despitesome progress associated with the start ofexploitation of an oilfield and to dynamicdemand from Australia, which provides amarket for half of manufactured-productsales.

The economic expansion should slowmark-edly in 2008, which should bring the growthrate to a level more consistent with availablecapacity and ease inflationary pressures: therestrictive monetary policy should finallyhave an effect despite fiscal policy that hasremained accommodating in the run-up toelections late this year. The efforts of thecentral bank will benefit from the strong

dependence of New Zealand’s private sectoron increasingly costly external financing.Residential investment will be undercut atonce by the negative impact of high interestrates on households whose debt burden nowrepresents 170 per cent of income and by thedecline of the migratory balance (with in-creased departures to Australia and fewerarrivals). Consumptionwill suffer fromrisingfood and energy prices, waning of the wealtheffect and the decline in mortgage equitywithdrawals. There are nonetheless a fewnoteworthy positive points: non-residentialand infrastructure construction will continueto benefit from liberal public spending, theNew Zealand dollar should weaken in thewake of the economic slowdown with importseasing and both traditional exports andtourist revenues growing in consequence.

Although at a very low level, the bank-ruptcy rate has been increasing moderatelysince 2005 and the expected economic slow-down will be unlikely to reverse that trend.Certain companies, already contending withrising wage and raw material costs and withan overvalued and fluctuating local currency,will experience difficulties. The sectors mostaffected will include the cattle and sheepindustry, horticulture (kiwis, apples, avoca-dos) and furniture. The wood sector hasmoreover been suffering from the decline ofresidential construction in the United States.

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% 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth 3.7 4.2 2.2 1.7 3.0 1.7Consumption (var.) 5.7 6.4 4.9 2.1 4.2 1.4Investment (var.) 13.4 15.9 12.5 −2.6 4.2 2.5Inflation 1.8 2.3 3.0 2.6 2.8 2.9Unemployment 4.6 3.9 3.7 3.7 3.4 3.5Short-term interest rate 5.4 6.1 7.1 7.6 8.6 8.0Public sector balance (%GDP) 3.9 3.6 4.1 7.3 5.4 3.9Public sector debt (%GDP) 32.0 29.0 27.0 23.0 22.0 21.0Exports (var.) 2.1 5.9 −0.5 1.9 2.5 2.8Imports (var.) 8.4 16.6 6.2 −2.5 7.3 3.0Current account balance (%GDP) −4.5 −6.5 −9.0 −8.7 −8.0 −7.0


PAYMENT AND COLLECTION PRACTICESAs a former British colony in the 19thcentury, New Zealand’s legal code and pre-cepts are largely inspired by British ‘commonlaw’ and the British court system. NewZealand became a dominion within the Com-monwealth on 26 September 1907.

■ PaymentsBills of exchange or promissory notes are notfrequently used for commercial transactionsin New Zealand and mainly serve to authen-ticate the existence of claims. Althoughcheques are still used in everyday domestictransactions, payment by electronic bank-card has been developing rapidly.

Wire transfers or SWIFT bank transfersare the most commonly used paymentmethod for domestic and international trans-actions. Most of the country’s banks areconnected to the SWIFT network, whichoffers a rapid, cost-efficientmeansofeffectingpayments. The New Zealand dollar, alongwith the main foreign currencies, is now alsopart of the Continuous Linked SettlementSystem (CLS), a highly automated interbanktransfer system for processing internationaltrade settlements.

■ Debt collectionThe collection process starts with the servingof final notice by recorded delivery, a ‘seven-day letter’ whereby the creditor notifies thedebtor of his payment obligations includingany contractual interest due. Without pay-

ment by the debtor company of an uncon-tested payable claim exceeding NZ$1,000 (orafter obtaining a ruling), the creditor maysummon the debtor to settle his debt within15 days or face a winding up petition withhis company considered insolvent (Statutorydemand under section 289 of the CompaniesAct 1993).

Under ordinary proceedings, once a state-ment of claim (summons) has been filed andwhere debtors have no grounds on which todispute claims, creditors may solicit a fast-track procedure enabling them to obtain anexecutory order by issuing the debtor withan ‘application for summary judgement’.Thispetition must be accompanied by an affidavit(a sworn statement by the plaintiff attestingto the claim’s existence) along with support-ing documents authenticating the unpaidclaim.

For more complex or disputed claims,creditors must instigate standard civil pro-ceedings, an arduous, often lengthy processlasting up to two years. Proceedings areheard by District Courts or, for claimsexceeding NZ$200,000, by the High Court.

Appeals against the decisions handeddown by the Court of Appeal, located inWellington, concerning claims for NZ$5,000and more are lodged, since 1 January 2004,and after it has granted leave on the legalvalidity of the case to be submitted to it, withthe recently established Supreme Court ofNew Zealand, also located in Wellington.

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Such recourse was previously sought via thePrivy Council in London.

A revision of the Judicature Act 1908 ledto establishment of a list of commercial caseseligible for processing via a fast-track proce-dure, for example in the fields of insurance,banking and finance, disputes on intellectualproperty rights, merchandise transport, com-mercial contracts and merchandise import/export.

The High Court of Auckland implementedthe first such ‘commercial list’ in April 1987.The High Court is also competent to hearinsolvency proceedings and maritime dis-putes.

During the preliminary phase,proceedingsare written insofar as the Court examines

the case documents authenticating the par-ties’ respective claims. During the subse-quent ‘discovery phase’, the parties’ lawyersmay request their adversaries to submit anyproof or witness testimony that is relevant tothe case and duly examine the case docu-ments thus submitted.

Before handing down its judgement, theCourt examines the case and holds an adver-sarial hearing of the witnesses who may becross-examined by the parties’ lawyers. Ar-bitration or Alternative Dispute Resolution(ADR), a mediation procedure, may also beused to resolve disputes and obtain out-of-court settlements, often at a lower cost thanthrough the ordinary adversarial procedure.


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WORLDNew Zealand

PAKISTAN

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PakistanPopulation (million inhabitants): 159.0GDP (US$ million): 128,830


STRENGTHS• With its geopolitical importance,

Pakistan enjoys the backing of theUnited States.

• Transfers from expatriates workingmainly in the Gulf constitute asignificant and stable source of revenuesdenominated in foreign currencies.

• The situation of public finances hasimproved markedly compared to the late1990s.

• As a cotton producer with a low-costworkforce, Pakistan enjoys a substantialcomparative advantage in the textilessector.

WEAKNESSES• The economy is very dependent on low

value-added sectors (textiles, cotton)subject to intense competition fromChina.

• Insufficient levels of investment andspending on education have hampered amove to higher value-added production.

• Pakistan’s western half – the northwestborder, Baluchistan – has partiallyescaped from Islamabad’s control.

• A strong current of latent instability(ethnic and religious conflict,fundamentalists against traditionalparties, the army’s role) cuts across thecountry’s very core.

RISK ASSESSMENTPakistan’s growth performance was verygood again, up 6.4 per cent, in the financialyear ending 30 June 2007. Since 2003–2004,the economy has grown about 7 per cent ayear. A good grain harvest resulted in in-creased farm production despite a decline inthe cotton harvest. The manufacturingsectorbenefited from major investments in thetextiles sector. Consumption, meanwhile,remained robust, buoyed by an emergingmiddle class and transfers from expatriateworkers. The strong demand coupled withinsufficient local supply in a context of highoil prices has resulted in large externalimbalances. Economic growth will conse-quently be unlikely to continue at the currentrate. The sharp rise of food and petrol pricesshould particularly affect household con-

sumption. Economic growth should thus easeto about 5.5 per cent this financial year andnext.

Political uncertainties should have an ef-fect on growth. Pakistan has been caught upin a new phase of instability since thedeclaration of a state of emergency late 2007and the murder of Benazir Bhutto. However,there seems to be little likelihood of agovernment takeover by radical Islamists ora breakout of civil war at the very core of thecountry’s economy (Pendjab, Sind). Even ifthe climate of instability will not be veryconducive to strict economic policy, in thenear term it should not significantly affectthe factors underlying the growth (expatriateremittances, a rising middle class and textilesector competitiveness).

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USD billions(*) 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.8 7.4 7.7 6.9 6.4 5.4Inflation (%) 2.9 7.4 9.1 7.9 7.7 7.9Public sector balance (%GDP) −2.7 −1.7 −3.8 −4.2 −4.2 −4.8Exports 11.9 13.3 15.4 17.0 20.3 23.1Imports 12.0 16.7 21.8 26.7 31.1 37.5Trade balance −0.1 −3.4 −6.4 −9.7 −10.8 −14.4Current account balance 3.6 −0.8 −3.7 −6.8 −6.9 −10.1Current account balance (%GDP) 4.3 −0.8 −3.4 −5.4 −4.8 −6.5Foreign debt (%GDP) 42.9 36.2 30.7 28.5 28.2 28.6Debt service (%Exports) 16.2 21.1 9.9 11.1 8.1 7.9Foreign exchange reserves (in months of imports) 6.4 4.8 3.7 3.5 4.0 3.8

*fiscal year ending 30 June of current calendar year, e = estimate, f = forecast


■ Means of entryMarket access is gradually being freed up.Customs duties in the industrial sector aretrending downwards. The maximum rate ofcustom duty is 25 per cent ad valorem (CIFvalue), with some notable exceptions such ascars, which are subject to a separate systemof taxation (50–90 per cent depending on thenumber of cylinders). The maximum rate ofduty in the service sector is 10 per cent. As arule, Pakistan follows the World CustomsOrganization’s harmonised international no-menclature and recommendations. Never-theless, exporters are advised to remainvigilant about Pakistan customs’ interpreta-tion of imported products. The practice ofapplying tariffs that place local importers ata disadvantage often results in disputes.Excise duty ranging from 5 to 15 per cent advalorem and a maximum of 15 per cent ongeneral sales tax apply to all goods andtransactions on top of customs duty. Cur-rently, excise duty is being phased out infavour of a broader sales tax. Flat-rate dutyis applied on the quantity of imported inter-mediate goods. The Pakistani rupee is par-tially convertible as transfers above a certainamount are subject to documentation. Al-though the currency is in a floating system,its rate is to some extent administered by thecentral bank, which intervenes on the cur-rency market to maintain a stable rupee

versus the dollar, ie between 60–61 rupeesto the dollar.

■ Attitude towards foreign investorsForeign investment is governed by speciallegislation. The Pakistan government is ex-tremely positive towards foreign investment,up sharply over the last few years to US $5.2billion in 2006 (3.6 per cent of GDP). In orderto attract more FDI, the government isstriving to create an investment-friendlyclimate via liberalisation, deregulation andcontinued privatisations. But for some sen-sitive sectors, all economic sectors are opento FDI, including manufacturing,agricultureand services. Capital flows have been liber-alised. There are no restrictions on 100 percent ownership of local companies by foreigninvestors, except in the agricultural sectorwhere there is a 60 per cent ceiling.Similarly,there is no requirement to tie up with a localpartner, except in construction and publicworks projects which are subject to tightrestrictions. The central bank allows foreigninvestors to repatriate capital, includingroyalties, profits, dividends and principal.There are also no restrictions on acquisitionsin the secondary market, nor any discrimi-natory measures regarding taxation or divi-dend payouts.

There is a minimum capital requirement of$0.15 million in services, $0.30 million in in-frastructure and $0.30 million in the caresec-tor. Corporation tax has been lowered to 35

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per cent in line with the rate applicable topublic-sector enterprises. As a result, banksand private-sector companies have seen theirtax rates reduced by 3 and 2 per cent, respec-tively, in 2006 and 2007, compared with 2005and 2006. Moreover, the Pakistan govern-ment has signed bilateral investment protec-tion agreements and double taxation treatieswith 47 and 52 countries, respectively.

It has ratified the 1958 New York Conven-tion on the Recognition and Enforcement ofForeign Arbitral Awards. The previousmech-anism for settling investment disputes madePakistan unattractive to international inves-tors. The country is also a signatory to theconvention establishing the Multilateral In-vestment Guarantee Agency (MIGA – WorldBank group).

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OPPORTUNITY SCOPE



Mn USDMn USD


USA AfghanistanUAE China UK SaudiArabia

China UAE JapanUSA

EXPORTS by products■ Textile 56%■ Leather and shoes 6%■ Foodstuffs 11%■ Oil products 5%■ Chemicals pharmaceutical products 3%■ Other manufactured goods 9%■ Other 10%

■ 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%

IMPORTS by products

0500

1000150020002500300035004000

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Indicators Pakistan Regional averageEmerging

country average

GNP per capita (PPP dollars) 2,500 5,929 5,983GNP per capita (USD) 770 1,814 2,313Human Development Index 0.539 0.683 0.672Wealthiest 10% share of national income 26 32 31Urban population % 35 37 44Percentage under 15 years old 38 28 30Number of computers per 1,000 inhabitants n/a 42 50

PAPUA NEW GUINEA

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Papua New GuineaPopulation (million inhabitants) 6.0GDP (US$ million) 5,654

Country @rating: BMedium-term rating: Moderately high riskBusiness climate rating: D

RISK ASSESSMENTEconomic growth was strong in 2007, drivenby robust exports, mainly of raw materialsparticularly gold, oil and copper, which rep-resent 80 per cent of the total. The principalclient has been Australia, with it providing amarket for 41 per cent of Papuan salesabroad. A possible downturn of copper pricescould, however, lead to a growth slowdownin 2008. The economy is moreover still shakydue to its excessive focus on ore and fuel withthe performance of agriculture and manufac-turing, especially textiles, remaining poor. Adeficient network of infrastructure mean-while has spawned bottlenecks that limitgrowth. And the business environment hasnot been very hospitable as evidenced by therecent overturning of the telephony licencesof two foreign companies in favour of domes-tic operators.

Increases in raw material prices in 2007allowed the country to run a large currentaccount surplus and slightly increase itsforeign exchange reserves. Should prices fall

in 2008, however, the surplus could shrinkalthough nonetheless remainingsubstantial.The fiscal surplus meanwhile declined in2007 amid expansionary fiscal policy in therun-up to the 2007 summer elections. How-ever, tight fiscal policy should resume in2008 and facilitate maintaining a surplus.Sovereign risk should thus remain limited.

Parliament re-elected Prime Minister SirMichael Somare to a fourth term in August2007. Economic policy should thus remainstable with little likelihood for privatisationof state-owned companies. The decision proc-ess will moreover remain slow and complexwith the new government required to contendwith a dissension-riven majority comprisingno fewer than 13 parties.

The country’s relations with Australia, itsmain trading partner, have been erratic andrecurring tensions have jeopardised eco-nomic cooperation projects. The governmenthas sought, meanwhile, to ease that depend-ency relationship and strengthen its eco-nomic and diplomatic ties with China.

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USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.2 2.9 3.4 2.6 5.2 4.5Inflation (%) 14.7 2.2 1.7 2.9 4.8 2.9Public sector balance (%GDP) –1.8 0.0 4.1 6.4 2.1 2.4Exports 2,201 2,555 3,300 4,100 4,600 4,800Imports 1,187 1,459 1,500 2,000 2,300 2,400Trade balance 1,013 1,095 1,800 2,100 2,300 2,400Current account balance (%GDP) 4.5 2.2 3.8 5.2 8.1 4.4Foreign debt (%GDP) 70.7 53.5 38.4 33.6 35.1 33.7Debt service (%Exports) 16.2 12.7 9.9 8.3 7.0 7.1Foreign exchange reserves(in months of imports)

4.3 5.5 5.3 8.3 8.7 8.6


PHILIPPINES

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PhilippinesPopulation (million inhabitants) 89.5GDP (US$ million) 116,931


STRENGTHS• The economy is highly specialised in

electronics, with exports representingnearly 70 per cent of sales in the sector.

• The country’s exports to East Asiacontinue to grow, representing 42 percent of total exports in 2006 against 26per cent in 1997.

• The country has remained competitiveparticularly in Special Economic Zones(SEZs).

• The skill levels, high productivity andadaptability of the workforce have beenassets, especially for multinationalcompanies.

• Incoming expatriate-worker remittanceshave benefited external accounts andhelped to mitigate the effects of politicalinstability and external shocks on theeconomy.

WEAKNESSES• A low rate of investment, particularly

from abroad, affected by the politicalinstability and a business climatemarked by corruption will limit thecountry’s growth potential.

• Inequality and demographic growth haveundermined economic performance.

• The country has an exceptionally lowsavings rate for Asia, which has made itdependent on financial markets.

• The lack of reforms and monitoring inthe banking sector constitutes aweakness.

• Insecurity – due particularly to theIslamist rebellion in the south of thearchipelago – is something of a deterrentto foreign investment.

RISK ASSESSMENTGrowth accelerated in 2007, driven by thesharp rise of exports and householdconsump-tion underpinned by expatriateworkertrans-fers that represented 10 per cent of GDP in2007 – a trend that should continue in 2008.An export slowdown is nonetheless expectedin 2008 due to the peso appreciation andsagging American demand. In this context,the payment experience recorded by Cofacehas been good with companies showing realdynamism in services, telecommunications,the retail trade, construction and anelectron-ics sector that continues to be the maineconomic driver. Corporate financial state-ments are, however, often not very reliable

with claim collection hampered by slow andcostly legal procedures.

The government’s financial situation isstill shaky despite deficit reduction efforts inthe public sector, with public sector debt stillhigh – now representing over 70 per cent ofGDP – and sensitive to interest rate risk.And the banking system remains too frag-mented with the stock of non-performingloans still substantial. The external situationis solid, however, with the current accountsurplus remaining high, thanks to privatetransfers and the many call centresoperatingin the country. External debt ratios havemoreover been coming down and foreignexchange reserves have been growing. A

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widening of the trade deficit in the wake ofthe rapid import growth expected in 2008will bear watching.

The political situation has been somewhatunstable. Although President Gloria Arroyohas fended off two attempts by the oppositionto initiate impeachment proceeding andcould be able to complete her full term in of-fice, which will normally end in 2010, she hasbecome increasingly dependent on military

support with the army attempting to stemthe Islamist and communist rebellions in thesouth of the archipelago. The May 2007 par-liamentary elections that proved favourableto the president’s Lakas Party took place,moreover, in a climate of violence and suspi-cions of electoral fraud. And even if the presi-dent has a good record of achievement onreforms, the country continues to suffer fromserious deficiencies in governance terms.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.0 6.2 5.0 5.4 6.6 6.0Inflation (%) 3.9 8.6 6.7 4.3 3.6 3.7Public sector balance (%GDP) –4.9 –4.2 –3.0 –1.9 –1.3 –0.4Exports 35.3 38.8 40.3 46.2 49.5 52.9Imports 41.2 44.5 48.0 53.1 57.2 64.3Trade balance –5.9 –5.7 –7.8 –7.0 –7.6 –11.4Current account balance 0.3 1.6 2.0 5.0 6.5 4.0Current account balance (%GDP) 0.4 1.9 2.0 4.3 4.6 2.4Foreign debt (%GDP) 78.9 70.4 62.4 51.2 42.9 36.7Debt service (%Exports) 16.9 13.8 15.2 14.4 10.2 9.5Foreign exchange reserves (in months of imports) 3.2 2.9 3.3 3.7 5.1 5.6

e= estimate, f = forecast


■ Market overviewOn the whole, the market is very open, withnon-tariff barriers more than anything elselimiting market access. Some imports aresubject to stringent regulatory restrictions,including the award of certificates by an ofteninefficient administrativeservice inacountrywidely seen as corrupt (ranked 131 out of179 on Transparency International’s 2007index). Eight tariffs currently apply: 0, 1, 3,5, 7, 10, 15 and 20 per cent (for sensitiveproducts). According to the WTO, the averageMost Favoured Nation (MFN) tariff fell from9.7 per cent in 1999 to 7.8 per cent in 2005and 6.3 per cent in 2006. Farm products havea higher tariff than non-agricultural goods(9.6 per cent against 5.8 per cent, respec-tively). Exceptional cases of protection re-main in force and there are fairly high levelsof tariff dispersion. Examples of high tariffsinclude animal products (21.3 per cent),sugar (16 per cent), clothing (14.9 per cent),

textiles (9.3 per cent) and transport equip-ment (8.6 per cent). High customs duties areat times doubled by swingeing excise dutieson some goods (champagne, cigarettes, spar-kling wine and certain makes of car). Whilea legal system is in place to strengthenintellectual property protection, its effective-ness is limited by the slowness of administra-tive procedures and the lack of resourcesavailable to judges to enforce legal decisions.For payments, the irrevocable and confirmeddocumentary letter of credit is recommended.

■ Attitude towards foreign investorsThe Foreign Investment Act 1991, amendedin 1996 and again in 1998, has liberalisedforeign investment regulations and helpedboost its growth. Notwithstanding, overallinvestment has been paltry these last fewyears. Two restrictive sector lists imposephased ceilings on foreign shareholdings(20–60 per cent). List A enumerates the sectorswhere foreign participation is restricted onconstitutional or legal grounds (media, the

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liberal professions, utilisation of naturalresources). List B concerns areas whereforeign ownership is restricted in sectorssuch as security, defence, public health,gambling, activities that undermine moralsand those that protect local SMEs. Thebanking sector is accorded special treatment.While foreign ownership of local banks waslimited to 60 per cent until 2000, the GeneralBanking Law of 2000 permits wholly foreign-owned banks for a seven-year period until2007. Land is reserved for Filipino citizensand 60 per cent locally held companies.Foreign investors may lease land to put up aproduction facility. All investment is subjectto the approval of the Board of Investmentsand the Security and Exchange Commission,which is responsible for registering, regulat-ing and supervising all foreign companiesand joint ventures. A One Stop Action Centrerun by the BOI disseminates practical infor-mation and facilitates administrative for-malities. It is advisable to engage a locallawyer. Foreign investors interested in infra-structure development can avail themselvesof the provisions of the Build-Operate-Trans-fer Act 1990 (amended in 1994). Tax incen-

tives are granted to investment in thedevelopment of underprivileged areas, ex-ports and the mining sector. These includeexemption from corporation tax, local taxesand customs duties on imported equipment,ad hoc tax rebates, accelerated depreciationand so on. In addition, there are severalcategories of special economic zones and tax-and duty-free zones, including buildings forICT companies in Great Manila. A review onrationalising these measures is under way.

Under an investment protection agree-ment between France and the Philippines, inforce since 13 June 1996, investors areprovided safeguards against all expropria-tion and nationalisation measures. Theagreement provides for the free transfer offunds and investments gains.

■ Foreign exchange regulationsThere are no exchange controls for ordinarytransactions, but there are restrictions oncapital transfers. Importers must documenttheir request for foreign exchange. Localbanks can, on the instruction of the centralbank, ask their clients to provide evidence insupport of their request for foreign currency.The exchange rate is floating.


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WORLDPhilippines

ASIA

298

OPPORTUNITY SCOPE



Mn USDMn USD


China JapanUSA Singapore HongKong

USAJapan China SaudiArabia

Singapore

EXPORTS by products■ Electrical and electronic equipment 47%■ Machinery 18%■ Foodstuffs 6%■ Vehicles 3%■ Copper 3%■ Clothing 3%■ Other 20%

■ Electrical and electronic equipment 41%■ Fuels 15%■ Machinery 12%■ Chemicals 8%■ Foodstuffs 7%■ Other 18%

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Indicators Philippines Regional averageEmerging

country average


SINGAPORE

299

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SingaporePopulation (million inhabitants) 4.4GDP (US$ million) 132,158


STRENGTHS• The country has been pursuing

ambitious diversification strategy,especially to high value-added sectorslike chemicals, pharmaceuticals andfinance.

• It is among the most advanced countriesof Asia in quality competitiveness terms.

• Singapore has become a major exporterof capital in Asia in many economicsectors – such as finance,telecommunications, transport – notablyvia the state-owned Temasek holdingcompany.

• The economy has benefited from thecountry’s political stability and excellentbusiness 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 theleast skilled could generate socialtensions.

• The very open economy is vulnerable to aworld economic downturn.

RISK ASSESSMENTEconomic growth remained strong in 2007,thanks to good export performance and asharp increase in consumption spurred by abright employment picture, rising real wagesand a positive wealth effect produced byrising property prices. A growth slowdownwill nonetheless be likely in 2008 amidweaker demand growth in the United States,Singapore’s number two trading partner.The foreign trade contribution to growth willthus decline especially with exports repre-senting 210 per cent of GDP. Economicperformance will nonetheless remain satis-factory, thanks to the growing proportion ofsales abroad going to Asia – now 60 per cent– and the diversification of the productivefabric. In this context, bankruptcies continueto decline, as reflected by the favourable

Coface payment incident index trend. Sin-gapore moreover boasts the best governancein Asia, thanks to an effective legal systemand a good level of financial transparency.

The financial situation has remained ro-bust as the equilibrium of public sectorfinances and the solidity of a banking systempoised to adopt Basel II prudential standardsattest. External accounts continue moreoverto show large surpluses, thanks to goodperformance in a range of sectors includingelectronics, transport, construction, tourismand financial services. The decline expectedin the current account surplus in 2008 shouldnot jeopardise Singapore’s exceptional finan-cial solidity.

Underpinned by substantial fiscal reservesand a large majority in parliament, thePeople’s Action Party of Prime Minister Lee

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Hsien Loong has sought at once to make thecity-state more attractive to foreign investorsand to bolster the specialisation in highvalue-added sectors to meet the growingcompetition from low-cost Asian economies.

Besides reductions in corporate income taxand tax incentives for companies setting upoperations in Singapore, the governmentcontinues to pursue its infrastructure andR&D investment policy.


USD billions 2003 2004 2005 2006 2007(e) 2008(f )

Economic growth 3.1 8.8 6.6 7.9 7.5 5.8Inflation (%) 0.5 1.7 0.5 1.0 2 3.5Public sector balance (%GDP) −1.6 −1.1 −0.3 0.6 0.3 0.1Exports 161.7 201.0 232.3 289.4 317.6 337.0Imports 132.2 168.1 194.4 244.2 272.9 294.5Trade balance 29.5 32.9 37.9 45.2 44.7 42.5Current account balance (%GDP) 24.3 24.5 28.9 31.5 27.5 23.8Foreign debt (%GDP) 24.1 22.0 20.4 18.5 16.9 16.8Debt service (%Exports) 1.7 1.4 1.3 1.2 1.2 1.2Foreign exchange reserves (in months ofimports)

6.0 5.6 5.1 5.1 5.2 5.3



■ Market overviewSingapore is a fervent advocate of multilat-eral trade through international institutions(WTO) and regional bodies (ASEAN, APEC).However, conscious of the difficulties inher-ent in ASEAN, since 2001 the city-state hasactively sought to establish bilateral agree-ments for most of its trade. As a result, it hasfree-trade agreements with New Zealand,Japan, EFTA, Australia, the United States,Jordan, India, South Korea, Panama andPeru. It has also been instrumental ininitiating trade talks in 2007 towards a free-trade agreement between ASEAN and theEuropean Union.

■ Means of entrySingapore’s exceptional openness to the out-side world is one of the keys to its economicsuccess. The country is a free port, withstorage and warehousing playing a signifi-cant economic role. Regardless of the inter-national economic situation, Singaporecontinues to pursue liberal trade and invest-ment policies, without the slightest sign ofinclination towards protectionism. Its tradepolicy is characterised by the near-total

absence of tariff protection measures, exceptfor customs duties on some alcoholic bever-ages. Non-tariff barriers are rare.

■ Attitude towards foreign investorsSingapore continues to keenly welcome for-eign investment and offers a very open andwell-planned economic and political environ-ment. The government uses foreign directinvestment to develop priority sectors (elec-tronics, chemicals, biotechnology). The aimis to encourage the growth of high added-value activities and turn the island into aregional hub for foreign investors looking todo business in Asia. The Economic Develop-ment Board (EDB) is a key player in thedevelopment and promotion of investment inSingapore. However, the country is onlypartially open to foreign investment in sec-tors such as the media and legal and financialservices. The government is starting to openthem up but progress is slow. Plans toincrease competition across the entire econ-omy were given the green light in theSingapore Competition Act 2004. However,though the act has been in force since 1January 2005, it has only been partiallyimplemented.

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■ Foreign exchange regulationsThe exchange rate is the key instrument ofgovernment monetary policy, which aims tomaintain a flexible rate within an adjustablefluctuation band. Since April 2004, the policy

of the Monetary Authority of Singapore(MAS) is to marginally raise the Singaporedollar’s exchange rate against a basket ofcurrencies of its main trading partners, themain component of which is the US dollar.


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OPPORTUNITY SCOPE



Mn USDMn USD


Malaysia HongKong

USA China Indonesia USAMalaysia China IndonesiaJapan

EXPORTS by products■ Electrical equipment 39%■ Machinery 18%■ Fuels 13%■ Chemicals 5%■ Other 25%

■ Electrical equipment 34%■ Fuels 19%■ Machines 16%■ Measuring equipment 3%■ Aircraft, spacecraft 3%■ Other 25%

IMPORTS by products

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Indicators Singapore Regional averageEmerging

country average


SOUTH KOREA

303

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South KoreaPopulation (million inhabitants): 48.4GDP (US$ million): 888,024


STRENGTHS• South Korea boasts a diversified

industrial base, competitive in newtechnologies and the automotiveindustry.

• In electronics, the country is the qualityleader.

• The degree of penetration of hightechnology in the domestic market isamong the highest in the world, with thecountry ranked fourth in the world for itsbroadband Internet penetration rate.

• An effective education system underpinsa highly skilled labour force.

• In terms of the number of patents held,South Korea ranks fourth in the world,after Japan, the United States andChina, thanks particularly to high publicR&D spending.

• South Koreans have broadened thegeographic scope of their investmentswith China, Vietnam, and Indiabecoming preferred destinations.

WEAKNESSES• The won appreciation has considerably

undermined the performance of lowvalue-added companies.

• South Korea is still a net beneficiary ofFDI flows particularly in services, themain weakness of the South Koreaneconomy.

• The steel and textile sectors havesuffered from Chinese competition.

• As the fourth largest world oil importer,the country is very dependent on rawmaterials.

• Households and small companies havebeen carrying too much debt.

• The ageing of the population constitutesa risk for public sector finances.

• The unpredictability of the North Koreanregime has weighed on South Korea’sgeopolitical environment.

RISK ASSESSMENTThe economy grew at a still-respectable 4.8per cent rate in 2007, driven by goods exportsand household consumption, itself spurredby an increase in disposable income and awealth effect caused by rising property andstock market prices. Buoyant foreigndemandbenefited electronics, the automotive indus-try and shipbuilding in 2007. The countryshould prove relatively insensitive to theslowdown in 2008 in the United States,which represents only 15 per cent of SouthKorean exports. In these conditions, the

Coface payment experience has generallybeen good. Large innovative companies con-tinue to post high profits albeit eroded by thewon appreciation. Small companies focusingon the domestic market have been weaker.

Financially, sovereign risk has remainedlow. Despite the decline of the currentaccount surplus in 2007 and the expectedemergence of a deficit in 2008, foreign debtremains limited. Although South Koreanbanks are sound and profitable, the extent ofhousehold debt raises fears of new difficultiesshould interest rates increase sharply.

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The political tensions with North Koreaseem to be easing. The presidents of the twoKoreas – Roh Moo Hyun and Kim Jong-Il –have committed themselves to opening ne-gotiations. Prospects for a peace treaty arenonetheless still uncertain: With the Decem-ber 2007 presidential elections allowing M.Lee Myung-Bak of the opposition GrandNational Party to succeed Roh Moo Hyun, atougher policy toward Pyongyang could

emerge. In the domestic sphere, the newPresident, M. Lee Myung-Bak, andthefuturegovernment resulting from the April 2008legislative elections will be expected to un-dertake reforms as regards combating cor-ruption and improving corporatetransparency. Chaebol governance, charac-terised by family control and hereditarysuccession, remains a particularly largechallenge.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.1 4.6 4.0 5.0 4.8 4.8Inflation (%) 3.4 3.0 2.6 2.1 2.8 2.5Public sector balance (%GDP) 2.7 2.2 1.9 1.8 1.9 2.5Exports 197.3 257.7 289.0 331.8 381.8 438.7Imports 175.3 220.1 255.5 302.6 356.6 412.4Trade balance 22.0 37.6 33.5 29.2 25.2 26.3Current account balance 11.9 28.2 15.0 6.1 1.4 -3.4Current account balance (%GDP) 2.0 4.1 1.9 0.7 0.1 -0.3Foreign debt (%GDP) 25.9 25.3 23.7 29.7 35.8 38.3Debt service (%Exports) 13.1 10.7 7.9 7.4 7.6 8.9Foreign exchange reserves (in months ofimports).

8.3 8.5 7.7 7.4 6.4 6.0



■ Means of entrySouth Korea’s import regime is fairly open,with most obstacles to import having beenlifted in the last few years. However, manytariff peaks remain, particularly in the agri-cultural sector. The weighted average rate ofcustoms duty is 45.5 per cent for the primarysector and 7.5 per cent for the secondarysector.

Despite the progress made by South Koreatowards opening up its market, obstacles totrade remain, mainly in the form of non-tariff barriers (different technical standards,tedious health inspections and tests, toughapproval procedures). Intellectual propertycompliance in South Korea continues tocauseconcern as infringement is widespread. Thegovernment, however, is determined tostrengthen compliance. Trademarks, for in-stance, are better protected today. The mainproblem remains weak pecuniary and penal

sanctions, as well as poor enforcement whichfails to deter re-offending.

Business relations with a Korean partnerare not quite as difficult as they are madeout to be. For ordinary business transactions,it is customary for the exporter to ask forpartial or total payment before shipment. Inany case, for small buyers the irrevocableletter of credit is recommended.

■ Attitude towards foreign investorsSince joining the OECD in 1996, South Koreahas pursued a highly proactive FDI promo-tion strategy and opened up almost all sectorsto foreign investment. The few restrictionsthat remain are often also found in thelegislation of other OECD countries (utilities,defence, agriculture).

Between 1995 and 2000, FDI inflows in-creased eightfold to $15 billion. Inflows havesince shrunk considerably, partly due to thedrying up of opportunities created by theopening of the market following the crisis.

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FDI since 2004 has settled around US$11billion a year. South Korea offers foreigninvestors effective legal protection. It is partyto 69 investment promotion and protectionagreements and 60 bilateral tax treaties.These agreements guarantee investmentprotection, free capital transfers and non-discrimination between foreigners and Ko-rean nationals. The free-trade agreementconcluded, but yet to be ratified, betweenSouth Korea and the United States, alongwith that under negotiation with the EUsince 2007 should further open up the coun-

try’s economy, which is the 11th most pow-erful in the world.

■ Foreign exchange regulationsThe won’s exchange rate is determined bythe currency market. Since January 2001,the currency has been freely transferableand all but fully convertible. The only restric-tions still in force are an approval procedurefor some transactions and the obligation onKorean residents to declare capital outflowsin excess of US$10,000. The foreign exchangeregime will be gradually but fully liberalisedby 2011.


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OPPORTUNITY SCOPE



Mn USDMn USD


China JapanUSA HongKong

Germany ChinaJapan USA UAESaudiArabia

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%

■ Electrical equipment 19%■ Unrefined petroleum 18%■ Machinery and equipment 11%■ Semiconductors 9%■ Ores and metals 7%■ Foodstuffs and agricultural raw materials 6%■ Divers 30%

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Indicators South Korea Regional averageEmergingcountry average


SRI LANKA

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Sri LankaPopulation (million inhabitants): 19.8GDP (US$ million): 26,967

Country @rating: BMedium-term rating: High riskBusiness climate rating: B

STRENGTHS• Exports have been dynamic, thanks to

the competitiveness of a textile sectormoving upmarket and of certain farmproducts, especially tea, rice, coconut andrubber.

• Sri Lanka boasts a satisfactory level ofhuman development (education, aliteracy rate exceeding 90 per cent, high-life expectancy) and quality governance.

• Proximity to the rapidly expandingIndian market has been a major asset.

WEAKNESSES• The conflict between the army and the

Tamil Tigers should drag on in theIsland’s northern region with the currentclimate not propitious for resolving theconflict peacefully.

• The economic still sorely lacksdiversification, with the dependence ontextiles alone constituting a majorweakness.

• The excessive debt service of high publicdebt has impeded the spending neededon infrastructure, the main growthbottleneck.

RISK ASSESSMENTGrowth remained strong in 2007 driven bytextile sector dynamism and the good per-formance of services. Expatriate workertransfers have also been spurring domesticdemand. The investment inflowshavecontin-ued due to the very good human developmentindicators, good governance, and the prox-imity to the Indian market. Tourism, thesector most affected by the continuing vio-lence, only represents under 1 per cent ofGDP. Those same positive factors shouldsupport growth in 2008 barring aggravationof the conflict in the island’snorthernregions.

With the conflict remaining highly locali-sed, it does not seem to have affected the

economy at this juncture. The risk of terroristaction has been high across the entire islandbut the economic impact should be limited.

A possible reduction in foreign aid could,however, undermine the coverage of financ-ing needs, especially with a growing currentaccount deficit and low foreign exchangereserves. The cost of the conflict has espe-cially been inflating public sector debt. Al-though external debt ratios have beenrelatively moderate, public debt – largelydomestic – has reached unsustainable levelswith the public deficit remaining excessive.The volume of debt interest has impeded theallocation of the resources needed for infra-structures modernisation, essential in devel-oping sustainable growth.

ASIA

308


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.0 5.4 6.0 7.4 6.0 6.1Inflation (%) 6.3 7.6 11.6 13.7 15.5 8.2Public sector balance (%GDP) -8.0 -8.2 -8.7 -8.3 -8.0 -7.7Exports 5.1 5.8 6.3 7.3 8.3 9.3Imports 6.0 7.2 8.0 9.4 10.6 11.9Trade balance -0.9 -1.4 -1.7 -2.1 -2.3 -2.6Current account balance (%GDP) -0.4 -3.0 -3.4 -3.7 -3.6 -3.7Foreign debt (%GDP) 57.0 55.2 48.5 45.2 43.4 42.4Debt service (%Exports) 7.5 9.6 5.3 8.7 7.4 7.4Foreign exchange reserves (in months of imports) 3.1 2.3 2.8 2.6 2.4 2.0


CONDITIONS OF ACCESS TO THE MARKET■ Means of entryHaving opened up some 70 per cent of itseconomy (thereby increasing its exposure tothe changeable international economic situ-ation), Sri Lanka welcomes foreign invest-ment, seeing it as a key driver in the country’smove towards much-needed modernisationof its infrastructure and production systems.Its legislative environment and trade prac-tices, based on the anglo-saxon model, makethe island a fairly free and attractive market.

Sri Lanka is ideally situatedat thegatewayto the Indian subcontinent, particularlysincethe ratification in 2000 of a free-trade agree-ment with India. It has simultaneouslypursued closer regional integration, ratifyinga free-trade agreement with Pakistan in2005. Under the GSP+ scheme, Sri Lankacan export duty-free almost all its productsto the European Union, subject to compliancewith certain rules of origin.

Numerous investment opportunities existin the service sector (eg, telecommunications,hotels, restaurants), in industry (eg, textiles,agri-foods, rubber) and infrastructure (eg,ports, energy). However, poor public infra-structure can, at times, be a problem forinvestors, especially outside Colombo.■ Attitude towards foreign investorsSri Lanka is open to foreign investment forwhich appropriate safeguard provisionsexist

under the country’s liberal regulatory frame-work, legislative system and constitution. Anon-discrimination principle ensures equal-ity of treatment for domestic and foreigninvestors, although there is a 100 per centsurtax on property acquisitions by non-nationals. Generally, there is no local part-nership requirement and only some sectorsare reserved for local investors. A foundingmember of the MIGA, Sri Lanka providessafeguards against expropriation and non-commercial and political risk. It also hasbilateral investment protection agreementswith many countries. These offer investorsprotection against possible nationalisationand provide for full compensation, if neces-sary, free repatriation of profit and capitaland arbitration via the ICSID. The Board ofInvestment (BOI) is responsible for promot-ing and monitoring investments. It offersmuch-needed assistance with a whole raft ofadministrative formalities relating to start-up, as well as numerous tax incentives.However, the present system discriminatesagainst SMEs and individuals by imposingan abnormally high minimum investmentthreshold. This discrimination is all the moreglaring as the government appears to bestepping up support for investment in large-scale projects to the detriment of smallerscale ones.

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309

3

OPPORTUNITY SCOPE



Mn USDMn USD


USA IndiaUK Belgium Germany ChinaIndia Singap0re MalaysiaIran

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%

■ Oil 21%■ Textiles 15%■ Machinery and transport equipment 14%■ Foodstuffs 12%■ Construction materials 5% ■ Other consumer goods 10% ■ Other 24%

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Indicators Sri Lanka Regional averageEmergingcountry average


ASIA

310

TaiwanPopulation (million inhabitants) 22.7GDP (US$ million) 345,900


STRENGTHS• The world’s fourth largest producer of

electronics, Taiwan is the leader formany products claiming 98.6 per cent ofthe world market for motherboards, 82.5per cent for laptops and 70 per cent forLCD monitors.

• Taiwanese companies are flexible andinnovative.

• 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 withHong Kong a market for 42 per cent ofTaiwan’s exports, and the United States,representing 15 per cent.

• The massive relocations haveundermined industrial employmentwhile the services sector lackscompetitiveness.

• The level of infrastructure has laggedbehind other advanced Asian economies.

• Relations with Mainland China continueto be the main source of uncertainty.

RISK ASSESSMENTGrowth slowed slightly in 2007 reflecting theslower growth in the United States, theIsland’s main trading partner consideringthat about 70 per cent of Taiwanese exportsto Mainland China are subsequently re-exported to the United States. Foreign tradewill cease being the main growth engine in2008, with the domestic demand recoverymaking it possible to partially offset thereduced contribution of net exports. Theelectronics sector, responsible for 50 per centof Taiwanese exports, achievedgoodperform-ance, thanks to the Island’s specialisation inhigh value-added products with labour-in-tensive activities relocated to MainlandChina. In this moderate-slowdown context,the payment experience recorded by Cofacedeteriorated with the margins of Taiwanesecompanies declining in 2007 for the thirdstraight year.

The external financial situation remainsrobust with high foreign exchange reserves(the world’s fourth largest in value terms)and a substantial, though declining, currentaccount surplus. The accumulation of fiscaldeficits has, however, resulted in the build-up of substantial public sector debt, repre-senting 50 per cent of GDP. The institutionof greater discipline – especially via taxreform that puts pressure on companies –has been stalled by the quasi-systematicopposition of parliament. The banking sys-tem, meanwhile, has to carry on with itsrestructuring programme.

In the run-up to legislative and presiden-tial elections, in January and March 2008respectively, the decision process on eco-nomic matters has been impeded by growingtensions between the Kuomintang and thePeople First Party, which have the majorityin parliament, and President Chen Shui-Bian’s Democratic Progressive Party. Weak-

TAIWAN

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ened, moreover, by corruption scandals,President Chen has intensified his anti-Chinese rhetoric. This resurgence of tensionswith Beijing could, nonetheless, ease if theopposition, believed to be more amenable to

dialogue, comes out with the majority in theforthcoming elections. The holding of thoselegislative and presidential elections in thefirst three months of 2008 could loosen upthe current wait-and-see situation.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.5 6.2 4.1 4.7 4.3 4.4Inflation (%) −0.3 1.6 2.3 0.6 1.1 1.4Public sector balance (%GDP) −3.5 −2.4 −1.7 0.2 −2.0 −2.0Exports 150.6 182.4 198.5 223.8 235.5 254.4Imports 125.7 166.2 180.6 200.4 214.3 236.9Trade balance 24.9 16.2 17.9 23.4 21.2 17.5Current account balance 29.4 18.6 16.0 24.5 23.9 19.4Current account balance (%GDP) 9.6 5.6 4.5 6.8 5.8 4.3Foreign debt (%GDP) 20.5 24.2 24.7 25.1 25.9 25.5Debt service (%Exports) 2.6 2.9 3.4 3.3 3.5 3.3Foreign exchange reserves (in months ofimports)

15.5 14.1 13.6 12.7 12.1 11.2



■ Market overviewThe Taiwanese market has no major barriersto the import of goods and services. For10 years or so, the Taiwanese governmenthas focused on widening market access andharmonising its regulations with interna-tional standards in order to pave the way forWTO accession. The country’s membershipof the organisation since 1 January 2002 isan additional asset for foreign companies.Customs duties, already low by comparisonwith the other countries of the region priorto WTO-accession, have been further re-duced. Rates for some 5,000 tariff lines willgradually be cut over a 10-year period from2002 to 2011. The first reductions came intoforce on 1 January 2002.The averagenominaltariff rate was cut from 8.3 per cent prior toaccession to 7.2 per cent and then to 5.5 percent in 2007. The biggest cuts concern farmproducts. Their average rate of duty waslowered from 20 to 16.3 per cent in 2002 andthen to the target rate of 12.9 per cent in2007. Tariffs have been eliminated for sev-eral product groups, including drugs andmedical equipment, toys, furniture, agricul-

tural machinery, construction equipment,paper and steel. Tariff quotas are appliedonly to imported private vehicles – subject toan annual increase of 20 per cent until theirabolition in 2011 – as well as some fisheryand farm products, including fresh milk.Geographical restrictions are in place forover 2,000 listed products from China.

Obstacles identified by foreign companiesinclude:• non-tariff barriers in the form of dispro-

portionate technical, environmental andsafety standards for cars on top of 21.8per cent duty (30 per cent outside quota);stringent health standards; laborious ex-amination and inspection procedures forfoodstuffs and excessive delays in issuingpermits for releasing a product on themarket and registering drugs on hospitallists. These barriers serve to protect sec-tors deemed sensitive by the government(for example, uncompetitively priced ag-riculture, automobile assembly, manufac-ture of generic drugs);

• deficient business practices, especially inmatters of public procurement (unfairterms, outrageous benefits for govern-

ASIA

312

ment customers) and intellectual prop-erty. While intellectual property law hasundoubtedly been improved since 2002 inline with the TRIPS agreements, trade-mark infringement persists and sentencescontinue to be enforced randomly by thecourts of first instance.

The letter of credit is the most widely usedmeans of payment in the country. To a lesserdegree, bank transfers and SWIFT are alsoused for business settlements. However,instruments other than the letter of creditshould be used with caution because of thedifficulties in enforcing court rulings againstdefaulters. Taiwan is neither a member ofthe International Centre for Settlement ofInvestment Disputes (ICSID) nor a signatoryto its 1966 convention or to the 1958 NewYork convention on commercial arbitration.As a result, it applies the principleofbilateralreciprocity, especially in matters of enforce-ment. On investment protection issues, theisland is therefore poorly ranked on BusinessMonitor International’s 2006 league table,with the second lowest safeguardratioamongAsian countries (20 per cent against a re-gional average of 40 per cent), ahead only ofChina whose ratio is 4 per cent. WTO-accession has nevertheless contributed to theadoption of international commercial stan-dards. The Financial Supervisory Commis-sion (the country’s stock market regulatorwith legislative powers) has announced theapplication of Basel II prudential rules toTaiwanese law within five years.

■ Attitude towards foreign investorsForeign companies encounter few adminis-trative obstacles to establishment despitesomewhat tedious formalities. Taiwan fareswell in international rankings on the ease-of-doing-business index, prepared by theWorld Bank, the World Economic Forum andthe IMD World Competitiveness Yearbook.However, its position has been eroded overthe last few years due to an insufficiently

modern banking and financial system, theabsence of business reforms and restrictionson the employment of foreigners.

Most foreign companies established on theisland make do by opening representativeoffices or branches in order to be commer-cially active. Those involved in a heavieractivity such as manufacturing operate viasubsidiaries incorporated as capital compa-nies having their own legal character andcommercial capacity usually in the form of ajoint venture with a local partner. Taiwan’scompany law contains discriminatory provi-sions against foreign-held subsidiaries.These can, however, be waived by obtainingforeign investment approval from the For-eign Investment Commission (FIC) underthe Ministry of Economic Affairs (MOEA).Approvals are difficult, even impossible, toobtain for protected sectors such as agri-foods, chemicals, pharmaceuticals,steelmak-ing and most services (media, post office,property, transport, leisure, utilities, etc).

■ Foreign exchange regulationsThe Taiwanese currency (new Taiwanesedollar, TWD) is not freely convertible andoperates within a supervised floatingexchange rate system. The Central Bank ofChina intervenes on the currency market,setting its central rate to reduce the cur-rency’s appreciation, particularly against theUS dollar and the yen, and so maintain thecountry’s international competitiveness.Tai-wan’s foreign exchange regulations are fairlystrict, although foreign investment approvalprocedures have been relaxed.


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WORLDTaiwan

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OPPORTUNITY SCOPE



Mn USDMn USD


MainlandChina

USAHong Kong JapanUSA Japan SouthKorea

MainlandChina

EXPORTS by products■ Machinery and electrical equipment 50%■ Metals 11%■ Plastics and rubber 7%■ Textiles and clothing 5%■ Vehicles, ships, aircraft 3%■ Other 24%

■ Machinery and electrical equipment 36%■ Ores 19%■ Metals 12%■ Chemicals 11%■ Precision instruments, clocks and watches 6%■ Other 15%

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Indicators Taiwan Regional average Emergingcountry average

GNP per capita (PPP dollars) 31,770 5,929 5,983GNP per capita (USD) 16,088 1,814 2,313Human Development Index n/a 0.683 0.672Wealthiest 10% share of national income n/a 32 31Urban population percentage n/a 37 44Percentage under 15 years old 19 28 30Number of computers per 1,000inhabitants

664 42 50

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ThailandPopulation (million inhabitants) 64.7GDP (US$ million) 206,247


STRENGTHS• The productive apparatus is diversified

and efficient in agriculture (rice, rubber)as well as industry (food, the carindustry, electronics).

• Thai industry has moved upmarket withthe high-technology sector nowgenerating over 60 per cent of exports.

• The country has been a regional hub withborders open to dynamic neighbours.

• The banking sector’s weaknesses havebeen reduced with a decline in non-performing loans, improved monitoringand adoption of international standardsfor risk management and transparency.

WEAKNESSES• Thailand’s foreign trade has suffered

from Chinese competition sometimesoffering the same product range in thesame markets.

• Investment is still too limited duenotably to problems with access tofinancing faced by smaller companies.

• Postponement of structural reforms(privatisation, investment ininfrastructure and education) has kepteconomic bottlenecks in existence.

• Persistent ties between the private sectorand politicians continue to affect thebusiness climate.

• The Muslim rebel insurrection in thesoutheast has been a source of recurringtensions.

RISK ASSESSMENTDespite the September 2006 coup and thepolitical uncertainties, Thailand managed toachieve respectable 4.2 per cent growth in2007, driven by strong exports, particularlyhigh technology and tourism. Low confidencelevels and sluggish domestic demand none-theless hurt companies financially in 2007,without, however, causing the Coface pay-ment experience to deteriorate. The politicalnormalisation process should foster a domes-tic demand recovery in 2008, thus offsettingthe repercussions of the economic slowdownin the United States, Thailand’s number oneclient country.

The government hasadoptedexpansionaryfiscal policy to stimulate growth. Publicsector debt should nonetheless remain mod-

erate, expected to represent 37 per cent ofGDP in 2008. Rapid export growth, mean-while, has resulted in a large current accountsurplus and appreciable cash flow. The con-trols applied to capital movement and thechanges in the rules on foreign shareholdinghave only had a marginal effect on the influxof investments, which should remain sub-stantial. The increasing recourse by privateplayers to debt denominated in foreign cur-rencies has nonetheless generated defaultrisk in a context marked by a lack of corporatetransparency.

The political situation is still uncertaindespite the adoption of the new constitutionby referendum in August 2007 and theholding of parliamentary elections in Decem-ber 2007. The constitution lacks legitimacy

THAILAND

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3

due to the high abstention rate. It has,moreover, increased the power of the militaryand bureaucrats at the expense of electedlegislators. By facilitating no-confidencevotes and impeachment proceedings, it has

set the stage for an unstable regime. In thatframework, the new government’s capacityto implement coherent economic policiesremains uncertain.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.1 6.3 4.5 5.1 4.5 5.5Inflation (%) 1.8 2.9 5.8 3.5 3.0 2.8Public sector balance (%GDP) 0.4 0.1 0.1 0 −1.7 −1.4Exports 78.1 94.9 109.2 127.9 151.1 169.5Imports 66.9 84.1 106.0 114.3 125.8 144.8Trade balance 11.2 10.8 3.2 13.7 25.3 24.7Current account balance 4.8 2.8 −7.9 1.7 13.5 10.3Current account balance (%GDP) 3.3 1.7 −4.5 0.8 5.6 3.8Foreign debt (%GDP) 38.0 32.9 31.2 28.2 23.7 20.8Debt service (%Exports) 9.6 7.6 5.4 5.3 4.5 4.0Foreign exchange reserves (in months ofimports)

5.3 5.0 4.2 5.0 5.8 5.9


CONDITIONS OF ACCESS TO THE MARKETA signatory to GATT in November 1982,Thailand became a WTO member on 1January 1995. A founding member of ASEANsince 1967, the country is a fervent advocatefor AFTA’s implementation within ASEAN,which provides for the complete dismantlingof its customs duties by 2010. It has alreadyslashed customs duties on goods traded withits ASEAN partners, excluding sensitiveproducts, to below 5 per cent.

Since 2001, Thailand’s trade policy hasfocused on promoting free trade with its mainpartners through regional, mainly bilateral,arrangements. It has signed a series ofbilateral trade agreements: an early harvestscheme with China in 2002 and then in July2005; with Bahrain in December 2002; anearly harvest scheme with India in Septem-ber 2003; with Australia in July 2004; withNew Zealand in April 2005 and with Japan(in force since 1 November 2007). Thailandis due to start talks with the European Unionin 2008 with a view to concluding a free-trade agreement. On the other hand, negoti-ations started with the United States in 2004remain suspended.

■ Means of entryThailand has gradually reduced import quo-tas under its WTO commitments, replacingthem with tariff quotas and fairly high cus-toms duties. Rates of duty for over one-thirdof tariff lines were cut in 2006 to 11 per cent inline with the overall simple average Most Fa-voured Nation (MFN) applied rate. The aver-age rate of customs duty is currently 8.8 percent for industrial goods and 25 per cent forfoodstuffs. These average rates, however,veilrelatively high levels of tariff protection, in-cluding tariff peaks for leading French ex-ports, especially consumer goods such asfoodstuffs, toiletries, cosmetics and cars.

Market access in many sectors remains dif-ficult and fairly restricted via high customsand excise duties (176 per cent for wines), aswell as technical, regulatory and administra-tive non-tariff barriers (mandatory import li-cences for foodstuffs, cosmetics and drugs,sector restrictions on foreigners, limited pro-tection of confidential data for pharmaceuti-cals, etc).

■ Attitude towards foreign investorsFor some 15 years, Thai economic growthhas been driven by exports and FDI. Thai-

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316

land’s manifold comparative assets continueto attract investors: exceptional geographicalsituation, social stability, expanding anddiversified industrial base, high-quality in-frastructure, good transport links and arevamped legal system. Having long capital-ised on the low cost of Thai labour as themain comparative advantage – one that istending to erode in the face of competitionfrom neighbouring countries like China andVietnam – the government is now looking toattract high added-value activities and com-panies offering transfers of technology andknow-how in an effort to meet the challengeposed by the Thai economy’s rise in the valuechain due to the country’s emergence as aneconomic power.

Using a mixture of tax incentives (exemp-tion from corporation tax, duty-free admis-sion for commodities and importedmachinery) and fast-track procedures (visas,work permits, property acquisition), in late2005 the Board of Investment (BOI) adopteda pro-active policy to attract foreign invest-ment in six sectors: agriculture and food-stuffs, automotive, electricity production andelectronics, alternative energies, high added-value services and biotechnology.

The foreign investment regime (ForeignBusiness Act of 4 March 2000) neverthelessretains numerous restrictions aimed at pre-serving national interests via ceilings onforeign shareholdings in strategic sectors(25, 40 or 49 per cent equity ownership), andcreates three business categories accordingto the level of foreign shareholding: activitiesfrom which foreigners are banned (for exam-ple, rice farming and fishing); activitiesclosed to foreigners on grounds of nationalsecurity or cultural identity (for example,arms trade, Thai handicrafts) and activitiesclosed to foreign capital because the govern-ment does not consider that the country isready to take on foreign competition (a longlist of services such as telecommunications,banking and insurance, legal counselling,wholesale and retail, accounting and adver-

tising). Foreigners can, however, obtain ex-emptions to engage in activities undercategories two and three. A bill amendingthe Foreign Business Act was proposed inautumn 2006 with a view to including major-ity voting rights in the definition of a foreigncompany, over and above the 49 per centforeign equity ownership ceiling. The bill’sreading in the national assembly (NLA) wassuspended last August by the Ministry ofTrade, following voting on an amendmentthat sought to add a third criterion, that ofmanagement control, for determining theforeign nature of an investment. These pro-visions not only appear to be incompatiblewith Thailand’s GATS commitments; theyalso detract from its attractiveness as aninvestment-friendly destination and encour-age a wait-and-see attitude from new inves-tors. The bill is still on the parliament’sagenda, but it is quite possible that itsadoption will be postponed to 2008 and itsprovisions amended by the new governmentformed after the general elections on 23December 2007.

■ Foreign exchange regulationsFrom the onset of the Asian crisis on 2 July1997, the baht has been floating against thedollar. Anxious to maintain the local cur-rency’s stability, the central bank intervenesonly on an ad hoc basis to cushion sharpfluctuations, and limit off-shoretransactions,of the baht. The Thai currency appreciatedby 14 per cent in 2006 and by a further 5 percent since 1 January 2007.


0

50

100

150

200

250

300

June 9

3

Dec-9

3

June 9

4

Dec-9

4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDThailand

THAILAND

317

3

OPPORTUNITY SCOPE



Mn USDMn USD


USA ChinaJapan Singapore HongKong

ChinaJapan USA UAEMalaysia

EXPORTS by products■ Electrical components and goods 19%■ Machinery 16%■ Foodstuffs 12%■ Vehicles, accessories 8%■ Chemicals 8%■ Rubber 7%■ Fuels 5%■ Other 27%

■ 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%

IMPORTS by products

0

5000

10000

15000

20000

0

5000

10000

15000

20000

25000

30000



Indicators Thailand Regional averageEmerging

country average


ASIA

318

VietnamPopulation (million inhabitants): 84.1GDP (US$ million): 60,883


STRENGTHS• The economy benefits from skilled, low-

cost labour that has attracted foreigninvestors.

• The development strategy adopted,based on liberalising the economy andexpanding the tertiary sector (tourismand financial services), seems to bebearing fruit.

• Participation in ASEAN and admissionto the WTO in January 2007 attest toVietnam’s good diplomatic and economicrelations with its main partners.

• The poverty rate has declined from 58per cent in 1990 to under 25 per cent by2006.

• The privatisation of state-owned banks,the opening up of the banking sector toforeign banks, and the project intendedto strengthen the independence of theCentral Bank augur well for the financialsector’s future development.

WEAKNESSES• Vietnam’s specialisation is still too

focused on price competitiveness andlow-end products.

• The civil service and legal environmentcontinues to lag far behind the majorAsian economies.

• Infrastructure (electricity, roads, railwaysystem and ports) is either dilapidated orunderdeveloped.

• Public sector reform remains incompletewith the sector still representing 31 percent of GDP and remaining less dynamicthan the private sector.

• Social and geographic inequality hasincreased, particularly between urbanand rural areas.

RISK ASSESSMENTThe economy should remain buoyant in 2008,driven by exports, strong consumption and ahigh investment rate, second in Asia afterChina. The risk of overheating is stillpresent,however, with the strong 8-per cent inflationof 2007 likely to persist in 2008 due to thepressure exerted by demand on productioncapacity. In these very buoyant economicconditions, the Coface payment experiencehas been good. There has been noticeableimprovement in the availability of informa-tion on companies. Nevertheless, the legaland regulatory systems are still deficient and

hardly capable of settling disputes betweeneconomic agents. Poor governance has re-mained Vietnam’s Achilles’ heel.

Financially, the country should continueto run a current account deficit in 2008 amidstrong import growth. But the capital flowsurplus should grow further in 2008 andlargely cover financing needs. The massiveinflux of FDI attracted by the skilled, low-cost labour and by Vietnam’s admission tothe WTO will also facilitate raising the levelof foreign exchange reserves, still relativelylow compared to other Asian countries. Theexcess liquidity generated by the large incom-

VIETNAM

319

3

ing financial flowsentails ariskofspeculativebubbles developing in the credit and stockmarkets. The Ho Chi Minh City index hassoared to spectacular heights. Volatility riskis thus high. Fiscal policy, meanwhile, haslacked transparency, while the cost of bank-ing reform will inflate public sector debt. Thecost of that reform could even grow with the

already high proportion of non-performingloans likely to increase due to acceleration ofthe credit expansion.

Vietnam has been politically stable. TheCommunist Party continues to exercise com-plete control over political, economic andsocial matters in the country.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.3 7.8 8.4 8.2 8.3 8.2Inflation (%) 2.9 9.7 8.8 6.6 8.0 7.3Public sector balance (%GDP) -6.4 -2.8 -5.9 -3.8 -6.9 -6.6Exports 20.1 26.5 32.4 39.8 46.7 55.6Imports 22.7 28.8 34.9 42.6 51.7 61.5Trade balance -2.6 -2.3 -2.4 -2.8 -5.1 -6.0Current account balance -1.9 -1.6 -0.5 -0.2 -2.2 -2.6Current account balance (%GDP) -4.9 -3.4 -0.9 -0.3 -3.2 -3.2Foreign debt (%GDP) 34.3 33.6 32.2 30.2 30.8 30.2Debt service (%Exports) 6.8 5.5 5.2 4.8 5.0 5.2Foreign exchange reserves (in months of imports) 2.4 2.2 2.5 2.8 4.0 4.0



■ Means of entryVietnam has been striving for several yearsto liberalise its trade. The first stage of thisprocess was membership of AFTA in 1995 aspart of the country’s regional commitmentsto ASEAN. Since 1 January 2006, it has beenfully integrated into AFTA. Currently, 95 percent of tariff lines in ASEAN are liable to 0–5 per cent customs duty.

Formal WTO-accession on 11 January2007 too has helped substantially to open upmarket access. Under its terms, Vietnam iscommitted to cutting customs duty to below15 per cent on 70 per cent of its industrialtariff lines. Tariff peaks of over 25 per centapply to only 7 per cent of tariff lines. At theend of a maximum 12-year period, averagecustoms duty on industrial goods will be 12.4per cent, and on agricultural goods it will belowered from its current level of 27 per centto 21. Vietnam agreed to abolish all quanti-tative restrictions and export subsidiesfor agricultural products from the date ofaccession.

It also agreed to considerably open upmarket access in the service sector. Whatmatters now is to monitor compliance withthese commitments. For instance, grey areasremain in the regulations dealing with im-port and distribution rights. Delays havealso been observed in the award of invest-ment licences to the subsidiaries of foreignbanks, not to mention the foot-dragging onthe IPOs of telecommunication companies.

■ Attitude towards foreign investorsForeign investment in 2007 is expected toovertake a record US$16 billion (up morethan 60 per cent on 2006), demonstratingincreasing investor confidence in the Viet-namese economy. The bulk of the investmentcomes from Asian investors (67 per cent),with France remaining the leading Westerninvestor (US$2.4 billion at 1 December 2007).

Vietnam has adopted highly investor-friendly laws. The passing of a single-invest-ment act based on the principle ofnon-discrimination between Vietnamese andforeign, private and public, investors was aprecondition for WTO accession. Under this

ASIA

320

law, investments below US$18.7 million onlyhave to be declared to the competent regionalauthority or, in the case of industrial areas,the management firm. On the other hand,projects above US$18.7 million or in a con-ditional sector are subject to an appraisalprocess.

While the investment act 2005 offers newforeign investors revised – and better – termsof investment (through the establishment ofprivate and public limited liability compa-nies, for example), it does not extend thesame terms and legal forms of company tothe 6,000 or so firms established before itsenactment. These firms are required to re-register.

Moreover, responsibility for awarding in-vestment licences has shifted from the Min-istry of Planning and Investment to itsregional units, which are not always familiarwith the new procedures. This leads to

excessive delays in processingre-registrationapplications.

As for the settlement of disputes, in addi-tion to questions of due process and jurisdic-tion, there is no guarantee that courtdecisions will be properly enforced. In reality,national arbitration is scarce, and movestowards international arbitration have madelittle headway.

■ Foreign exchange regulationsThe currency regime is based on a fluctuationband with a dollar peg. However, the Bankof Vietnam intervenes on the currency mar-ket to limit the dong’s average annual depre-ciation to between 1 and 1.5 per cent.Vietnam completely liberalised its currentaccount transactions on 5 January 2006,retroactive to 8 November 2005, and nowcomplies with IMF article VIII (lifting ofrestrictions on international currency trans-actions and transfers).

VIETNAM

321

3

OPPORTUNITY SCOPE



Mn USDMn USD



USA AustraliaJapan China Germany SingaporeChina Japan ThailandSouthKorea

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%

■ Machinery and transport equipment 17%■ Chemicals 14%■ Petroleum products 13%■ Iron and steel 7%■ Textiles 6%■ Foodstuffs 6%■ Other manufactured goods 32%■ Other 6%

IMPORTS by products

0

2000

4000

6000

8000

10000

0

2000

4000

6000

8000

10000


Indicators Vietnam Regional averageEmergingcountry average

GNP per capita (PPP dollars) 3,300 5,929 5,983GNP per capita (USD) 690 1,814 2,313Human Development Index 0.709 0.683 0.672Wealthiest 10% share of national income 29 32 31Urban population percentage 26 37 44Percentage under 15 years old 30 28 30Number of computers per 1,000 inhabitants 13 42 50

4

The MiddleEast andNorth Africa

Outlook for 2008:The Middle East and North Africa 324

Algeria 331Bahrain 335Egypt 339Iran 343Iraq 347Israel 349Jordan 353Kuwait 357Lebanon 361Libya 365Morocco 369Oman 373Palestinian Territories 376Qatar 378Saudi Arabia 382Syria 386Tunisia 390United Arab Emirates 394Yemen 397

OUTLOOK FOR 2008

324

OUTLOOK FOR 2008

North Africa and Near & Middle EastCatherine MonteilEconomic Studies and Country Risk Department, Coface

■ The oil wealth has benefited the entireregion, whose growth remains buoyant

GDP growth close to emerging country average (%)

0

2

4

6

8

2001

2002

2003

2004

2005

2006

2007

2008

%

Emerging CountriesMiddle East excluding Turkey

Most of the region’s economies, generating10.5 per cent of total emerging-country GDP,performed well in 2007 despite the geopolit-ical uncertainties. With barrel prices multi-plied by 2.5 between 2003 and 2007, the oilwealth in producer countries – which repre-sent 68 per cent of regional GDP – created averitable investment dynamic also benefitingmost non-producer countries in the region.The outlook remains bright for 2008 sup-ported by the many investment projectsunder way in infrastructure, industry andproperty and a still buoyant environmentwith oil prices unlikely to decline in theforeseeable future.

In oil-producing countries, the non-oil sector – driven by investment andhousehold consumption – should con-tinue to support growth. Despite pro-gress on diversification, the economiesremain very dependent on oil revenues.

Oil sector performance should be generallybetter in 2008 than it was in 2007, with

downward production adjustments havingbeen made last year notably by SaudiArabia in its swing-producer role. With theprospect of slower world demand growth,however, affected by the American economicslowdown, a small increase in hydrocarbonproduction will continue to weigh on overallregional economic growth. There shouldnonetheless be exceptions: Qatar with thestart-up of the gas pipeline to the Emirates,and to a lesser extent Libya, progressivelyrestoring its production capacity, as well asOman. With the high barrel prices, oilrevenues have prompted, to various degrees,expansionary fiscal policies underpinninghousehold consumption and spurring eco-nomic diversification.

The non-oil sector should thus continue togrow strongly and underpin economic expan-sion. Gulf Cooperation Council, or GCCcountries – Saudi Arabia, Bahrain, theUnited Arab Emirates, Kuwait, Omanand Qatar – are going forward with vastprivate and public sector investment pro-grammes intended to develop the infrastruc-ture, industry (the upstream anddownstream oil and gas industries) andservices (water, electricity, telecommunica-tions, tourism, finance, health, education),underlying future economic development.Although construction has experienced anunprecedented boom, bottlenecks, a creditslowdown and rising costs could delaycertainlarge projects. The growing stock of devel-oped property in Dubai could result in a pricecorrection, but a sudden market collapseseems unlikely at this juncture in view of therapid population growth. In Algeria publicsector investment planned under the GrowthConsolidation Programme should continue

OUTLOOK FOR 2008

325

4

to underpin growth. Libya has also stimu-lated its economy through public spending.Iran’s political and financial isolation due toits positions on the nuclear issue has under-mined the business climate and could con-tinue to affect growth, which will remainsupported by public spending.

Booming domestic demand and the result-ing bottlenecks along with the increasingcost of imported products attributable torising prices for staple commodities and theweakness of the dollar, to which most re-gional currencies are pegged, have generatedinflationary tensions that could linger on,particularly in Iran, the United Arab Emir-ates and Qatar.

With the exception of Kuwait, which optedfor a peg to a basket of currencies in May2007, the dollar pegs of the other GCCcountry currencies have not been called intoquestion thus far and they should remain inplace in 2008.

GDP growth rate for the region’s oil exporting countries (%)

0

2

4

6

8

10

12

14

Qatar

Oman

Libya UAE

Bahrain

Algeria

Saudi A

rabiaKuwait

Iran

2007e 2008f

The economies of the other NorthAfrican and Near and Middle Easterncountries will remain buoyant in 2008,generally benefiting from the oil boom.The most vulnerable among them,Lebanon and Yemen, have mobilisedmassive international aid which shouldstimulate growth.

Egypt and Jordan should continue toachieve strong growth driven by domesticdemand. They have benefited from the oilboom through investments by producer coun-tries and remittances from emigrant work-ers. Liberal policy options have fostered aclimate of confidence conducive to consump-tion and investment. In Syria, depletion ofoil reserves has affected growth, and invest-ment and household consumption, buoyed byremittances from emigrant workersandIraqirefugees, should continue to support eco-

nomic activity. In Yemen, the region’spoorestcountry, the recession gripping the oil sectorshould ease, and the progressive implemen-tation of projects funded by international aidshould spur growth. The ongoing politicalinstability in Lebanon could continue toaffect the economic activity. Although theUS$7.6 billion promised in international aidshould breathe new life into the economy,implementation of that aid will largely de-pend on an easing of the political situationand a return of institutions to normal func-tioning. Israel’s economy remains sensitiveto a slowdown in American demand. Privatedemand, buoyed by easing unemployment,should consequently be the main growthengine.

In Tunisia, growth should remain under-pinned by dynamic investment in infrastruc-ture, notably tourism, and the productivesector. Economic activity should alsocontinueto benefit from a buoyant tourist sector andanexceptional services boom. Subject to favour-able weather conditions, growth should re-bound in Morocco, driven by transport andtourism infrastructure investments, textileexports and a rural consumption recovery.

GDP growth rate for non or low oil-producing countries (%)

0

2

4

6

8

Egypt

Jord

an

Mor

occo

Tunisia

Israe

l

Yemen

Syria

Leba

non

2007e 2008f

■ Large fiscal surpluses in most oilcountries contrast with troublesomedeficits in non-oil regional countries

Oil-producing countries should continue torun large surpluses that vary in size over arelatively wide range, from 12 per cent ofGDP on the low end (Algeria, Saudi Arabiaand Qatar) to 30 per cent of GDP on thehigh end (UAE, Libya and Kuwait). Iran’sfiscal budget should, however, again bebarely in balance as a result of a policy ofbroad redistribution of oil export revenues.

OUTLOOK FOR 2008

326

Lebanon, Egypt, Jordan, Syria andYemen should continue to run large def-icits, attributable to the public sector debtburden and the cost of subsidies, compoundedby rising oil and staple commodity prices. InLebanon in particular, the public debt bur-den has given rise to large fiscal deficits. De-spite international aid, sovereign default riskis still very high particularly if the Lebanesepound devalues, interest rates rise or thecountry’s main source of financing – commer-cial banks – dries up. Syria and Yemen havestruggled to establish new sources of revenueto replace dwindling oil revenues. In anycase, a shaky social climate exacerbated byregional conflicts and poverty, and the risk ofgains by Islamism complicate the task ofoverhauling public sector finances. In Israela decline in revenues in 2008 due to thegrowth slowdown could result in a public def-icit larger than in 2007.

Non oil prooducing countries: public deficit in % of GDP

-20-18-16-14-12-10

-8-6-4-20

Leban

on

Egypt

Jordan

Israe

lM

orocc

o

Tunisia

2007e 2008f

■ A strong external position at theregional level masks the disparitiesbetween oil and non-oil countries.

Very comfortable current account surplus (%)

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005 2006 2007 2008

Middle East excluding TurkeyEmerging Countries

External accounts of the wealthiest oil coun-tries should continue to show solid surplusesin 2008 ranging from 20 to 50 per cent ofGDP in most cases. Supposing still highbarrel prices, the trade balances will remainlargely in surplus, despite the rising cost ofimports. These countries should conse-quently continue to consolidate alreadystrong financial positions in view of theirgenerally limited levels of debt and consid-erable official foreign exchange reserves orforeign assets. Iran’s surpluses have, how-ever, been the smallest (under 10 per cent ofGDP) due to production and refining capacityremaining limited as a result of years ofembargo. Its foreign exchange reserves al-though reasonably large are modest com-pared to those of other regional oil-producingcountries.

The external financial position of non-oil or marginally oil-producing coun-tries is more modest, but foreigninvestment, capital flows, and in somecases grants should, however, continueto cover their financing needs. In 2008,only Israel would be able to run a surplus(estimated at 3 per cent of GDP). AlthoughEgypt’s traditional foreign currencyearnings– oil/gas, Suez Canal, and remittances fromemigrant workers – continue to trend up, thegrowth of imports concomitant with theeconomic expansion will continue to strainthe current account. Syria and Yemenshould be able to limit the deterioration oftheir current account deficits, thanks to highbarrel prices and remittances from emigrantworkers. For Lebanon and Jordan, bothvery dependent on imports, the increasingcost of oil and staple commodities shouldprevent them from significantly reducingdeficits – estimated, respectively, at 12 and18 per cent of GDP excluding grants – thatwill remain the largest in the region inrelative terms. FDI shouldcontinueto largelycover Jordan’s financing needs. In an uncer-tain regional geopolitical environment, how-ever, a worsening of the situation couldundermine investor confidence. Lebanon’sexternal financial position remains precari-ous and vulnerable to a crisis of investorconfidence, a high risk in view of the contin-uing political instability.

OUTLOOK FOR 2008

327

4

For North African non-oil countries, steadytourism revenues andexpatriateremittanceshave offset widening trade deficits attribut-able to the growth of oil imports. Tunisia’scurrent account deficit should thus remainlimited, while Morocco should continue torun a current account surplus.

External debt ratios below emerging country average (% of goods and

services exports)

0%20%40%60%

80%100%120%140%

2001 2002 2003 2004 2005 20062007 2008

Middle East excluding TurkeyEmerging Countries

Oil countries generally have limitedforeign debt with debt ratios in relation togoods and services exports ranging from 10to 40 per cent. Since Algeria repaid its publicsector debt ahead of schedule in 2006, itsratio has been the lowest in the region, about5 per cent. In the UAE conversely, privateforeign debt has been growing rapidly andcould reach 63 per cent of export revenues in2008 up from just 32 per cent in 2005. Riskof overindebtedness has to be considered,however, in light of the country’s considera-ble financial holdings abroad, which put it ina net creditor position. Although Qatar’sforeign debt remains high in absolute terms,it has nonetheless declined in relation to thecountry’s growing foreign currency revenues.The debt is largely secured by long-termexport contracts, and the ratio of debt serviceto foreign currency revenues remains a mod-erate 10 per cent.

Most other countries have high for-eign debt but Lebanon holds the recordwith a ratio of debt to goods and servicesexports that could remain near 180 percent in 2008. International aid has allowedLebanon to reduce debt service, which none-theless remains high, representing 32 percent of foreign currency revenues. AlthoughIsrael and Tunisia have comparably high

debt, around 100 per cent foreign currencyearnings, debt-service remains manageable.With a policy of active debt management,Morocco has reduced its ratio of foreign debtto goods and services exports to below 50 percent. The Kingdom as well as Egypt, Jordan,Syria and Yemen have all benefited fromrescheduling, which reduced debt service tobelow 10 per cent of goods and servicesexports.

■ The major geopolitical hot spotsconcentrated in and around that part ofthe world although posing threats toregional equilibrium have thus far hadonly limited impact on the regionalboom

Despite a relatively calm period, Iraq couldremain in a state of chaos with the progres-sive withdrawal of foreign troops moreoverinitiating a new period of uncertainty. Thecountry’s institutions are shaky, and therisks of civil war and partition remain high.In that context, the Kurdish minorities inneighbouring countries constitute a factor ofregional destabilisation. Kurdistan is al-ready experiencing heightened tensions withTurkey. Iran’s positions on the nuclearissue and its backing of terrorist movementshave resulted in the country’s political andfinancial isolation. The assessmentbyUnitedStates intelligence services that Iran’s nu-clear weapons programme was halted in2003 eliminates at this juncture a scenarioof destruction nuclear sites by the UnitedStates. The risks of Iran’s nuclear pro-gramme resulting in military weapons havenonetheless not disappeared; the likelihoodof tensions easing with the internationalcommunity thus remains remote. The Is-raeli–Lebanese conflict in summer 2006has given way in Lebanon to politicalrivalries between pro- and anti-Syrian par-tisans. The climate of insecurity and result-ing institutional gridlock has underminedeconomic activity with limited prospects fornormalisation of the situation. The breakbetween Fatah now withdrawn to the WestBank, and Hamas, confined to the GazaStrip, has complicated the regional situationand reduced the chances for success of a

OUTLOOK FOR 2008

328

renewal of the peace process between thePalestinian Territories, Israel and Syriain the wake of the Annapolis conference.

The Israeli–Palestinian conflict and thesituation in Iraq remain at the heart ofregional tensions. They exacerbate anti-Is-raeli and anti-American sentiment, whichserves as a catalyst to the rise of radicalIslamism and of opposition to regional gov-ernments that generally have good relationswith the United States and its allies in thewar against terrorism. This is notably trueof the Gulf monarchies, Egypt, Jordan andYemen, and, in North Africa, of Algeria andMorocco.

These uncertainties have thus far notaffected a regional boom still underpinnedby oil prices. Although subsidies, improvedinfrastructure and social services have gen-erally facilitated maintaining a relativelypeaceful social climate, the situation has,however, impeded structural reforms that inmany cases would make it possible to consol-idate public finances. It has also underminedprivate investment, which has beenunderperforming.

Morocco and Tunisia, meanwhile, con-tinue to enjoy real political stability thatprovides the right framework for speedingup the pace of structural reforms. The frus-tration of young graduates who join theranks of the unemployed in very high num-bers has nonetheless significantly increasedsocial risk. Despite the buoyant growth andthe social reforms undertaken, efforts toreduce youth unemployment will remain amajor near-term challenge.

■ Business environment quality varieswidely in the region

The ratings of the countries in the regioncover virtually the entire range from A2 forIsrael to D for Iraq, Libya and Yemen. Therelatively good A2 rating for the businessclimate in Israel is better than the countryrisk rating due to the high political risk. Inmany regional countries, the business envi-ronment is often undermined by legislationproviding little protection to creditors. Inmany cases, moreover, the absence or theopacity of corporate financial informationconstitutes an additional risk. The business

climate ratings are thus not as good as thecountry risk ratings for wealthy oil countriesenjoying very good economic and financialsituations. The UAE, Kuwait and Qatarare rated A3 with generally good institu-tional frameworks especially as regards in-frastructure quality and access to financing,although financial information is often defi-cient. Algeria and Saudi Arabia are ratedB, notably reflecting deficiencies in the insti-tutional environment in Algeria and debtcollection difficulties in Saudi Arabia.Libya’s D rating reflects its particularlydifficult business environment due to a laby-rinthine bureaucracy, a still undevelopedlegal system and the lack of corporatetransparency.

Some countries have identical ratings fortheir business climate and their country risk.This is true for Morocco and Tunisia, ratedA4, Egypt rated B and Syria rated C.Morocco and Tunisia, in particular, haveundertaken major reforms to improve thebusiness environment, even if there arepersistent weaknesses, especially concerningdebt collection. In Egypt, efforts have beenmade to improve the business environment,especially as regards access to credit, butthere are persistent governance weaknesses.

The business climate ratings for JordanA4 and Lebanon B are better than theirrespective country risk ratings affected byfinancial and political weaknesses.

■ The creditworthiness of regionalcompanies has generally been goodwith limited payment default risk,except for Iran

The Coface payment incident index for re-gional companies has remained below theworld average. The record has been good inIsrael, although companies may, however,feel the effects of the American demandslowdown. The overall economic environ-ment has remained buoyant for companies,benefiting from a very liquid market, rela-tively low interest rates, and a pervasiveclimate of dynamism. This has been particu-larly true for the Gulf monarchies, especiallythe UAE. As for Saudi companies, paymentbehaviour can sometimes be unpredictable

OUTLOOK FOR 2008

329

4

Business climate rating: Middle East & Northern Africa

Israe

l

Bahra

inUAE

Kuwait

Qatar

Jord

an

Mor

occo

Oman

Tunisia

Algeria

Saudi A

rabia Egy

pt

Leba

non Iran

Syria Ira

qLib

ya

Yemen

A1

D

C

B

A4

A3

A2

while it has continued to improve for Egyp-tian companies. In Lebanon, despite thedifficulties, companies have held up reason-ably well as regards payment behaviour. InAlgeria, Tunisia and Morocco, despite re-peated payment delays, payments defaultshave remained limited. In Iran, however, thebank boycott has paralysed corporatepayments.


3.7% 3.6%

2.0%

4.9%

2.2%2.7%

6.4%

5.6% 5.5% 5.4%4.9% 4.9%

0

50

100

150

200

250

300

0%

1%

2%

3%

4%

5%

6%

7%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (e)

2008 (f)

Economic growth (%)


■ Country @rating trendsThe regional risk level exceeds the overallemerging-country average. In this region ofthe world, geopolitical instability representsa high risk that undermines individual rat-ings, particularly for Iran, Saudi Arabia,Israel, Egypt, Jordan, Lebanon, Syriaand Yemen.

The ratings have remained stable,except for Iran whose rating has beendowngraded to D amid the growing ten-sions with the international community andthe country’s increasing political and finan-cial isolation which are undermining thebusiness climate and apt to affect corporatepayment behaviour.

Tunisia’s A4 rating remains positivewatchlisted with the country’s economic dy-namism underpinned by far-reaching struc-tural reforms that should ultimately resultin greater diversification of the productivefabric. Conversely, Morocco’s A4 rating hasbeen removed from positive watchlist statusdue to the economy’s increased vulnerabilityto weather conditions.

Jordan’s B rating remains negativewatchlisted due to the country’s continuingexternal and fiscal account imbalances andconsiderable vulnerability to a crisis of inves-tor confidence if the political situation shoulddeteriorate. Lebanon’s C rating remainsnegative watchlisted with the unstablepolitical situation impeding a veritable eco-nomic recovery and the external and fiscaldeficits remaining large. Despite the difficul-ties, however, companies have thus far heldup well as regards payment behaviour.

OUTLOOK FOR 2008

330


January2002

January2003

January2004

January2005

January2006

January2007

January2008

UAE A2 A2 A2 A2 A2 A2 A2Kuwait A2 A2 A2 A2 A2 A2 A2Qatar A2 A2 A2 A2 A2 A2 A2Bahrain A2➘ A2➘ A3 A3 A3 A3 A3Oman A2➘ A2 A2 A3 A3 A3 A3Saudi Arabia A4 A4 A4 A4 A4 A4 A4Libya C C C C C C CIran C C C B B B DIraq D D D D D DAlgeria B B B➚ B➚ A4 A4 A4Morocco A4 A4 A4 A4 A4 A4➚ A4Tunisia A4➘ A4➘ A4 A4 A4 A4➚ A4➚

Israel A3➘ A4 A4➘ A4 A4 A4 A4Egypt B B B➘ B B B BJordan B B B B B B➘ B➘

Lebanon C C C C C C➘ C➘

Syria C C C C C C CYemen C C C C C C C

ALGERIA

331

4

AlgeriaPopulation (million inhabitants): 33.3GDP (US$ million): 114,727

Country @rating: A4Medium-term rating: Quite low riskBusiness climate rating: B

STRENGTHS• The country boasts substantial natural

wealth and Europe provides it with animmense market.

• The oil stabilisation fund, intended toallow the country to weather an oilmarket downturn, has contributed tofinancing the economic growth supportprogramme.

• The government achieved its debtreduction policy successfully.

• The country is engaged in a reform andeconomic liberalisation process.

WEAKNESSES• The economy is very dependent on oil

revenues.• Unprofitable, overstaffed state-owned

companies continue to weigh on publicsector finances.

• High youth unemployment, althoughtrending down, has been a source ofsocial tensions and an impediment tocertain reforms.

• A lack of infrastructure and a deficientbanking system, despite the reformsunder way, have affected the businessenvironment.

RISK ASSESSMENTThe non-oil economy posted strong growth in2007 estimated at 6 per cent underpinned bycontinued public investment under the eco-nomic growth support programme and buoy-ant household consumption, spurred by civilservice wage increases. Construction, theautomotive industry, pharmaceuticals andthe food sector outperformed. However, anoil production slowdown reflecting the exter-nal demand trend undermined overall eco-nomic growth estimated at 4.8 per cent. Thegrowth outlook for 2008 is bright with theeconomy’s growth rate expected to accelerateat 5.2 per cent. The planned increase in gasproduction will foster an oil sector recovery.In the non-oil sector, domestic demand (pub-lic investment and household consumption)will drive economic activity. Anexpansionarybudget, rising wages and the increasing costof imported products attributable to thedinardepreciation against the euro should con-

tinue to stoke inflationary pressures. Pru-dent monetary policy should, however, holdinflation to about 4 per cent.

The country currently enjoys unprece-dented financial health with very limitedforeign debt and very ample foreignexchangereserves sheltering it from a liquidity crisis.With the prospect of continuing high oilprices, external and public accounts shouldcontinue to show large surpluses. Althoughcompanies have benefited from very buoyanteconomic conditions, progress on the struc-tural reforms that could also benefit them,particularly those in the banking sector, hasbeen lagging as exemplified by delays in theprivatisation programme. Moreover, devel-opments in the security situation will con-tinue to bear watching. The businessenvironment has occasional shortcomings(poor corporate transparency and red tape)and can be responsible for late payments andclaim collection difficulties.

THE MIDDLE EAST AND NORTH AFRICA

332


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.9 5.2 5.3 2.7 4.8 5.2Inflation (%) 2.6 3.6 1.6 2.2 4.6 4.3Public sector balance (%GDP) 4.9 5.3 13.7 14.5 13.0 12.2Exports 24.5 32.2 46.3 54.6 63.3 69.9Imports 13.4 18.0 19.9 21.4 26.1 31.7Trade balance 11 14 26 33 37 38Current account balance 7.7 10.1 21.5 28.3 31.6 32.0Current account balance (%GDP) 11.4 11.9 20.9 24.5 24.6 23.3Foreign debt (%GDP) 34.7 25.9 16.8 4.2 3.6 3.1Debt service (%Exports) 14.7 15.0 10.5 20.6 2.3 2.2Foreign exchange reserves (in months of imports) 19.1 18.9 21.9 27.3 31.4 34.5


CONDITIONS OF ACCESS TO THE MARKETMarket overview Regulatory framework:Theassociation agreement between Algeria andthe EU, in effect since 1 September 2005,involves the immediate or gradual disman-tling of tariff barriers for three lists ofindustrial products and the abolition ofduties on certain intermediate goods and rawmaterials. Under the second and thirdphasesof the agreement, which came into effect on1 September 2007, duties on some finishedgoods will be phased out over a five-yearperiod and tariffs on other finished goods,particularly those currently taxed at 30 percent, will be gradually eliminated.

Protocols between Algeria and the EU arein place for the gradual liberalisation ofbilateral trade in agri-foodstuffs. Since 1September 2005, annual tariff quotas areapplied to some processed farm products ona ‘first-come first-served’ basis.The low capi-talisation of many recently established Al-gerian companies and the lack oftransparency of their balance sheets hamperthe work of the few audit firms in themarketplace. While the servicesof recognisedaudit firms are still rarely used, their pres-ence is likely to grow in coming years as thenumber of Algerian-based foreign companiesmultiplies. The most widely recommendedmeans of payment is the documentarycredit, or in its place the documentary bill,if the business relationship is sound anddependable.

■ Attitude towards foreign investorsAlgeria does not discriminate between localand foreign investment in manufacturingand services (development, capacity expan-sion, rehabilitation, privatisation-relatedbuy-ins or buy-outs), or investments made inconnection with the award of concessionsand/or licences (Decree No. 01-03 of 20August 2001). Identical tariff preferencesand tax concessions to encourage investmentare granted to locals and foreigners. Whollyforeign-held subsidiaries are permitted tooperate in most sectors open to privateinvestment, including financial services.

The law guarantees repatriation of allinvestment capital and earnings. A certainnumber of sectors (telecommunications, seaand air transport, electricity and gas supply,mining) have been opened up to privateinvestment. However, the oil and gas sectortook a turn for the worse in 2006, with theabolition of the 2005 provisions grantingmore freedom to foreign companies. As aresult, windfall tax has been reintroduced,along with the obligation to tie up withSonatrach (the national operator) as themajority partner in all exploration, produc-tion and transportation projects.

In general, ‘productive’ investment iswelcome. Conversely, trade and retail arenot open to foreign investment. Fee transfersrelating to services and intangible invest-ments (royalties, etc) continue to poseproblems.

ALGERIA

333

4

■ Foreign exchange regulationsThe dinar is fully convertible for the paymentof imported goods and services. However,local banks enforce strict exchange controlsas they are required to furnish evidence ofeach transaction to the Central Bank. In2007, the central bank simplified importprocedures for services provided by foreign-incorporated entities having won a contractin Algeria (Regulation No. 07-01 of 3 Febru-ary 2007). The import of services is nowsubject to ex-post verification by the Bank of

Algeria similar to the procedure applied inrespect of goods transactions, with the Alger-ian importer’s local bank responsible forexamining the dossier. Similarly, since 2005,requests for dividend transfers, profit repa-triation and transfer of income from assetdisposals – permissible in proportion to theforeign investor’s share in the capital of anAlgerian law company (Regulation No. 05-03of 6 June 2005) – are examined and dealtwith by the local bank.


334

OPPORTUNITY SCOPE



Mn USDMn USD


USA SpainItaly France Canada ItalyFrance China SpainGermany

EXPORTS by products■ Fuels 98%■ Other 2%

■ Industrial equipment 40%■ Semi-finished goods 19%■ Foodstuffs 17%■ Consumer goods 15%■ Raw materials 4%■ Direct investments 4%■ Other 2%

IMPORTS by products

0

3000

6000

9000

12000

15000

0

1000

2000

3000

4000

5000

6000



Indicators Algeria Regional averageEmerging

country average


BAHRAIN

335

4

BahrainPopulation (inhabitants): 739,620GDP (US$ million): 12,914


STRENGTHS• As the leading financial centre in the

region, Bahrain has nonetheless beencontending with growing regionalcompetition.

• The economy is open and diversified(hydrocarbons, aluminium, financialservices and tourism).

• Government officials have pursueddynamic policy to foster investment.

• Maintaining good relations with theUnited States, the Kingdom hosts thefifth fleet and the two countries haveconcluded a free-trade agreement.

WEAKNESSES• The decline of oil production is worrying,

with the economy remaining verydependent on oil revenues and itsindustry energy intensive.

• The disparities in living standards andinstitutional representation between theruling Sunnite minority and the Shiitemajority in the country have beenrecurring sources of tension.

• Unemployment has remained highamong the local population, with theBahrainisation of jobs being a slowprocess in view of its potential effect oncorporate competitiveness.

RISK ASSESSMENTA dynamic non-oil sector was the maineconomic driver in 2007, growing at a goodclip (up an estimated 7 per cent), but none-theless not as rapid as the expansion overthe past two years, which was underpinnedby the start-up of a fifth aluminium smelterby the state-owned Alba company. The sectorbenefited from a highly liquid economy andthe regional boom spurred by high barrelprices, which fostered household consump-tion and public and private investment. Thefinancial sector and construction continuedto outperform. After their good performancein 2006, services associated with tourismcontinued to trend up. In the hydrocarbonsector, meanwhile, oil production stoppeddeclining and a 5 per cent increase in gasproduction resulted in positive growth esti-mated at 0.5 per cent for the sector while theoverall economy grew an estimated 6.3 per

cent last year. In a still-buoyant regionalcontext, the 6-per cent economic growthshould be maintained in 2008. In view of theinvestment dynamic in the region, financialservices will remain buoyant as will construc-tion, stimulated by the implementation ofmany industrial, property and infrastructureprojects. The privatisation programme andthe gradual liberalisation of public serviceshave attracted foreign investment.

Buoyed by the barrel prices, the externalfinancial situation has been healthy witha liquidity crisis relatively unlikely. Despitethe growth of imports fuelled by thestronger domestic demand and the risingcost of the products imported, especially oil,external accounts have shown large sur-pluses allowing the country to accumulateforeign assets. Thanks to the oil revenues,the government has enjoyed room to ma-noeuvre to develop infrastructure and in-


336

vest in the education and health sectors.Despite the regional geopolitical tensionsand a shaky social climate, the business

climate has been good, underpinned by theopportunities available to investors and bythe regional dynamic.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.2 5.6 7.8 7.5 6.3 6.0Inflation (%) 1.6 2.4 2.6 2.1 3.3 3.1Public sector balance (%GDP) 1.8 3.4 7.6 4.9 2.4 4.8Exports 6.7 7.6 10.1 11.7 13.1 14.3Imports 5.3 6.1 7.6 8.6 9.6 10.4Trade balance 1.4 1.5 2.5 3.1 3.5 3.9Current account balance 0.2 0.4 1.6 1.9 2.2 2.6Current account balance (%GDP) 2.1 3.6 11.7 12.6 13.7 14.8Foreign debt (%GDP) 54.0 47.9 41.3 37.0 34.8 32.7Debt service (%Exports) 6.4 5.9 3.7 3.2 2.8 5.3Foreign exchange reserves (in months ofimports)

2.0 1.8 1.6 1.7 1.9 1.9



■ Market overviewThe Kingdom of Bahrain has a liberal tradepolicy designed to attract maximum FDI,diversify the country’s economy and reduceits dependence on hydrocarbons. As a found-ing member of the WTO, Bahrain has a longtrading tradition and is regarded as one ofthe most open markets in the Gulf. It hasproven this several times since 2001 througha series of measures to free up trade beforeits GCC neighbours. These include acquisi-tion by foreign companies of a 100 per centstake in a Bahraini company, introduction ofanti-money laundering regulations and har-monisation of customs duties with the GCCcommon external tariff from 2003. The Cen-tral Bank of Bahrain is seen as a role modelin matters of supervision and regulation andhas been instrumental in transforming Bah-rain into the region’s financial hub.

Customs duties on imports from non-GCCcountries are 5 per cent for all but 53 duty-free products. Alcohol and cigarettes areliable to 125 and 100 per cent duty, respec-tively. Under the GCC free-trade agreement,any product with a 40 per cent GCC compo-nent is eligible for duty-free admission intomember countries. The decree of 13 March

1998 allows foreign companies not to bebound to a sole agent and to choose theirpartner according to the project. The countryremains the financial centre of the region,facilitating the establishment of banks, fi-nancial institutions and insurance compa-nies by means of flexible regulations andattractive tax laws, overseen by the centralbank. Bahrain is the first GCC state to signand ratify, in 2006, a free-trade agreementwith the United States.

■ Attitude towards foreign investorsBahrain offers foreign companies a highlyattractive legal and tax environment. Theprovisions include no VAT, corporation taxor income tax; unrestricted fund transfers;up to 100 per cent foreign ownership of aBahrain company in certain sectors (infor-mation and communication technologies,health care, tourism, training, services,man-ufacturing) and unrestricted acquisition ofland by foreigners in some areas.

Trade is encouraged by the free movementof persons (visa at airport) and exemptionfrom customs duties on goods for re-exportand material and machinery intended formanufacture. As well as these benefits, in2001 the foreign investment-friendly Bah-rain government set up an Economic Devel-

BAHRAIN

337

4

opment Board to facilitate and speed upadministrative formalities. In co-operationwith the Ministry of Trade and Industry, theEconomic Development Board (EDB) has setin place a fast-track registration procedure

for companies. The government is studyingways of reforming the labour market in a bidto reduce unemployment, create a free mar-ket and eventually abolish job quotas forBahraini nationals in some sectors.


338

OPPORTUNITY SCOPE



Mn USDMn USD


SaudiArabia

JapanUSA UAE SouthKorea

JapanSaudiArabia

USA GermanyUK

EXPORTS by products■ Oil 79%■ Aluminium 13% ■ Other 8%

■ Petrol 56%■ Vehicles 7%■ Machinery 6%■ Chemicals 4%■ Electrical equipment 4%■ Other 23%

IMPORTS by products

0100200300400500600700800

0

500

1000

1500

2000

2500

3000

3500



Indicators Bahrain Regional averageEmergingcountry average

GNP per capita (PPP dollars) 18,770 7,746 5,983GNP per capita (USD) 14,370 4,167 2,313Human Development Index 0.859 0.716 0.672Wealthiest 10% share of national income n/a 27 31Urban population percentage 90 59 44Percentage under 15 years old 27 32 30Number of computers per 1,000 inhabitants n/a 92 50

EGYPT

339

4

EgyptPopulation (million inhabitants): 75.4GDP (US$ million): 107,484


STRENGTHS• The business climate has benefited from

an active reform programme and aregional economic boom.

• Egypt boasts diversified sources offoreign exchange (the Suez Canal,tourism, private transfers and oil and gasexports).

• 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 financeslimiting the capacity for infrastructuredevelopment.

• The banking system is not yet capable ofmeeting the economy’s needs.

• The tourism sector, whose revenues areof fundamental importance to the currentaccount balance and economic growth,remains vulnerable to the terroristmenace.

RISK ASSESSMENTThe economy grew strongly in 2007, drivenby domestic demand. The government’s lib-eral approach since 2004 has fostered aclimate of confidence conducive to consump-tion and investment. The economy has alsobenefited from the boom in the oil countriesvia their investments and emigrant workerremittances. In this context, the businessenvironment is improving with the Cofacepayment incident index remaining below theworld average. While the gas sector hascontinued to develop, manufacturing, con-struction, tourism and communications haveachieved excellent performance. The outlookfor 2008 is bright with growth likely to reachbetween 7.0 and 7.5 per cent.

The external financial situation remainshealthy amid the good trend on foreigncurrency earnings and the increase in foreigndirect investment fuelled by the privatisa-tions. Debt service is low, and Egypt iscontinuing to build up foreign exchangereserves. However, the fiscal deficit andpublic sector debt remain a source of concern.Controlling public spending and reducingthedebt necessitates a spending overhaul thatwill take time. Regional conflicts and povertyhave strengthened Islamist opposition move-ments. In this context, social climate is tenseand officials have exercised caution in pur-suing reforms.


340


USD billions(1) 2003/4 2004/5 2005/6 2006/7(e) 2007/8(f) 2008/9(f)

Economic growth (%) 4.1 4.5 6.8 7.1 7.3 7.4Inflation (%) 16.6 4.7 7.2 8.5 7.9 8Public sector balance (%GDP)(2)(3) -7.1 -7.5 -8.1 -5.7 -6.6 -7.1Exports 10.5 13.8 18.5 22.0 26.2 28.6Imports 18.3 24.2 30.4 37.8 45.6 50.9Trade balance -7.8 -10.4 -12.0 -15.8 -19.4 -22.3Current account balance(3) 2.5 1.9 0.4 1.0 0.6 -1.1Current account balance (%GDP) 3.2 2.1 0.3 0.8 0.4 -0.6Foreign debt (%GDP) 37.9 32.2 27.5 24.2 20.2 17.1Debt service (%Exports) 9.5 8.1 8.2 5.2 5.0 6.2Foreign exchange reserves (inmonths of imports)

7.4 7.4 6.9 7.3 7.4 7.4

(1)tax year ending 30 June, (2)general government, (3)ex grantse = estimate, f = forecast


■ Market overviewGenerally speaking, the Egyptian economyis opening up on the back of governmentinitiatives giving top priority to modernisingthe economy and allowing in foreign compet-itors. As a result, imports have doubled inthree years and continue to grow sharply,offering new opportunities to firms in theconsumer and capital goods sectors.

■ Means of entryWide ranging tariff reforms have lowered theweighted average rate to 6.9 per cent andsimplified the tariff nomenclature. Egyptfully applies the WTO customs valuationagreement, even though the customs author-ities still tend to revise declared amountsupwards in order to counter underinvoicing.

There is an ever-decreasing number ofobstacles restricting market access. In alimited number of cases, import bans areapplied to all trading partners for reasons ofeconomic or environmental necessity, healthand safety (bird flu, hazardous waste). Har-monisation of Egyptian standards with Eur-opean ones is under way and more than3,000 standards have already been harmon-ised. Responsibility for overseeing standardscompliance continues to be shared between

various ministries, departments and agen-cies in extremely technicalfields(agriculture,health, energy, telecommunications). In allother fields, compliance supervision powershave been merged into the General Organi-sation for Import and Export Control(GOEIS), dependent on the ministry of tradeand industry. Obstacles to market accesscrop up from time to time in the form oflabelling and packaging standards and re-quirements, especially for foodstuffs.

■ Attitude towards foreign investorsPromoting foreign investment is a clearlydeclared government priority. There are norestrictions on the transfer and repatriationof dividends and capital. A largeprivatisationprogramme is under way. Key local compa-nies (in the banking, cement and retailsectors, for example) have already been soldoff to foreign investors. As a result, FDIsoared for the first time to 10 per cent of GDPin 2006/2007.

■ Foreign exchange regulationsThe Egyptian pound is freely convertibleunder a managed float which ensures ahighly stable exchange rate parity versus theUS dollar. For payments, the irrevocable andconfirmed documentary letter of credit isstrongly recommended and widely used.

EGYPT

341

4


0

50

100

150

200

250

300

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDEgypt


342

OPPORTUNITY SCOPE



Mn USDMn USD


Italy SpainUSA UK ChinaUSA Germany SaudiArabia

Italy

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%

■ Intermediate goods 25%■ Capital equipment 24%■ Consumer goods 11%■ Crude oil 9%■ Non-durable goods 8%■ Chemicals 12%■ Other 12%

IMPORTS by products

0

500

1000

1500

2000

2500

0

1000

2000

3000

4000

5000

France



Indicators Egypt Regional averageEmerging

country average


IRAN

343

4

IranPopulation (million inhabitants): 69.2GDP (US$ million): 222,889


STRENGTHS• Iran is the second largest producer in

OPEC, and its gas reserves are theworld’s largest after Russia.

• It has moderate foreign debt.

WEAKNESSES• The positions taken by Iran on its

nuclear programme have prompted theUnited Nations to retaliate withsanctions and have led to the country’seconomic and financial isolation,undermining the business climate andjeopardising its economic developmentprospects.

• Short-sighted management of oilrevenues has increased the economy’svulnerability to a downturn in barrelprices.

• The public sector is predominant andefforts on reforms have stalled.

• The World Bank’s governance indicatorsclassify the country as high risk.

RISK ASSESSMENTPublic spending should continue to drive theeconomy while stoking high inflation, whichis undermining household consumption.Growing tensions with the internationalcommunity over the nuclear issue and thesanctions levied by the United Nations andthe United States will continue to sour thebusiness climate and deter investment. Eco-nomic growth should thus be limited. Theincreasing reluctance of foreign banks withrespect to Iran could ultimately affect corpo-rate payments.

The external financial situation presentsno particular difficulty at this stage. Foreignexchange reserves should remain at comfort-able levels, limiting liquidity crisis risk.Public accounts have, however, been givingcause for concern. Despite excellent oil mar-

ket conditions, the lack of a surplus evidencesa policy of extensive redistribution of oilexport revenues. Rationing measures on fuel,whose price has been heavily subsidised,should nonetheless facilitate better resourceallocation.

The expansionary budget has limited thecapacity to save oil revenues and increasedthe economy’s vulnerability to a decline inbarrel prices. The structural reforms, neces-sary to consolidate government finances,diversify the economy and attract foreigninvestment, have stalled with their prospectsappearing compromised at this junctureamid the political uncertainties.

The government’s economic and foreignpolicy options have been the subject ofincreasing criticism. Despite social meas-ures, unrest has been exacerbated by soaring


344

prices, persistently high unemployment andpetrol rationing. In this context, the ultracon-servatives could emerge weakened from this

year’s parliamentary elections. But the un-certainties surrounding Iran’s nuclear pro-gramme constitute the main risk.


USD billions 2003/4 2004/5 2005/6 2006/7(e) 2007/8(e) 2008/9(f)

Economic growth (%) 6.9 4.8 5.4 5.0 4.5 4.3Inflation (%) 15.6 15.2 12.1 14.6 17.8 17.0Public sector balance (%GDP)* 1.3 1.7 5.5 -1.5 0.0 0.5Exports 34.0 43.9 60.0 66.7 70.9 73.5Imports 29.6 38.2 41.0 45.7 48.1 50.4Trade balance 4.4 5.7 19.0 21.0 22.8 23.1Current account balance 0.8 1.4 14.0 17.0 18.6 19.1Current account balance (%GDP) 0.6 0.9 7.4 8.3 7.6 6.9Foreign debt (%GDP) 13.5 15.9 14.3 13.5 11.4 10.0Debt service(%G&S exports) 7.9 7.5 4.9 4.4 6.2 6.2Foreign exchange reserves (inmonths of imports)

7.5 8.0 10.2 11.6 12.1 12.1

* including revenues allocated to the Oil Stabilisation Fund, e = estimate, f = forecast


■ Means of entryThe political situation is tense due to theIranian government’s rejection of Europeanproposals – backed by Russia, China and theUnited States – and its refusal to meet itsobligations under Security Council and IAEAresolutions. These tensions create politicaland commercial risk.

It should be noted that Iran was sanctionedby UN Security Council resolutions 1737 and1747 adopted on 23 December 2006 and 24March 2007, respectively, by virtue of Article41 of the UN Charter (measures ‘not involv-ing the use of armed force’). The EU hasadopted the instruments for implementingresolution 1737 (Common Position 2007/140/CFSP of 27th February under Council Regu-lation (EC) No. 423/2007 of 19 April 2007),together with Common Position 2007/246/CFSP of 23 April 2007, which amends Com-mon Position 2007/140 to take account ofresolution 1747. These EU regulations areavailable on www.diplomatie.gouv.fr/autori-tes-sanctions/, which also lists the Frenchgovernment departments responsible fortheir implementation.

When adopting CP 2007/246 of 23 April2007, the EU decided to provide a legal

framework for its policy, established since1997, of not selling arms to Iran. The exportto Iran of all materials on the EU’s militarylist is banned, including any technical orfinancial assistance relating thereto. The EUhas also introduced a ban on travel visas formanagers of Iran’s nuclear and ballisticmissiles programmes.

In addition, under Common Position 2007/246 and in application of paragraph 7 ofresolution 1747, the EU sets forth newfinancial sanctions by calling on states andinternational financial institutions to end allnew grants, financial assistance and conces-sional loans to the government of the IslamicRepublic of Iran, except those designed tofinance projects of a humanitarian nature orcontributing to development.

The EU has moreover widened measures,beyond the provisions of resolution 1747(which mainly targets the Iranian state-owned bank Sepah), to freeze the assets ofand prohibit financial transactions with anynew persons and entities involved in Iran’snuclear and ballistic missile programmes.

At the moment, the sanctions are mainlyfocused on the country’s nuclear and ballisticmissile programmes, as well as arms exports.The sanctions may be restricted in scope, but

IRAN

345

4

they are likely to affect some economicprojects, especially those involving dual-usegoods for nuclear and ballistic missile pro-grammes (certain special purpose machinetools could, as a result, face an export ban)or any joint venture scheme with entitiesdesignated in resolution 1747 and related tothese sectors.

Extreme caution is called for in the circum-stances. In an interview with the New YorkTimes on 24 September 2007, the Frenchpresident publicly expressed his views on theissue, pointing out that France was callingon its companies, especially in the energysector, to hold back and advising them to‘refrain from going to Iran’ in the currentcontext.

In a communique issued on 11 October2007, the Financial Action Task Force(FATF) expressed concern over the absencein Iran ‘of a comprehensive system forpreventing money laundering and combatingthe financing of terrorism’, and called onfinancial institutions toapply tightercontrolson their clients’ financial transactions fromand to Iran. This communique was adoptedon 19 October 2007 by the G7, which deemedit desirable that financial institutions takeinto account the risks posed by Iran. Ingeneral, the international financial commu-nity is exercising caution over its dealingswith Iran.


346

OPPORTUNITY SCOPE



Mn USDMn USD


Japan TurkeyChina Italy SouthKorea

ChinaGermany UAE FranceSouthKorea

EXPORTS by products■ Crude oil 72%■ Refined petroleum products and natural gas 7%■ Manufactured goods 6%■ Agricultural raw materials 4%■ Other 11%

■ Raw materials and intermediate goods 47%■ Capital equipment 17%■ Petrol 8%■ Consumer goods 8%■ Other 20%

IMPORTS by products

0

2000

4000

6000

8000

10000

0

1000

2000

3000

4000

5000

6000



Indicators Iran Regional averageEmergingcountry average


IRAQ

347

4

IraqPopulation (million inhabitants): 28.7GDP (US$ million): 49,516


RISK ASSESSMENTA still very difficult political and securitysituation continued to undermine the capac-ity for economic recovery and reconstructionin 2007 and resulted in slower growth esti-mated at 1.3 per cent. In a context of violence,population displacement and emigration ofthe most educated Iraqis, public sector in-vestment and household consumptionshowed little dynamism while oil productionstagnated. The Iraqi dinar appreciation,constrained public spendingandtightermon-etary policy contributed to limiting inflationwhich eased to 25 per cent in 2007. Priceincreases should continue to ease this year.An improved climate of security – perceptiblelate last year – could foster stronger growthin 2008, notably making it possible to accel-erate public sector investment. It could alsocontribute to restoring consumer confidence.Oil prices should remain high and a 10 percent increase in oil production seems achiev-able at this juncture. The political outlookhas however remained uncertain and grad-ual withdrawal of foreign troops from Iraqcould give rise to increased instability thatwould again affect economic activity. An

acceleration of FDI in this context will berelatively unlikely.

The oil revenues underpinning govern-ment finances could prove insufficient tofinance the public investment programme ifproduction fails to increase fast enough. Thefiscal deficit excluding donations was held toa negative 1.5 per cent of GDP in 2007. Butan acceleration of the investmentprogrammein 2008 coupled with a reduction in aidshould give rise to a larger deficit estimatedat 10.4 per cent of GDP excluding donations,which could be covered by financial holdingsabroad.

The external financial situation improvedwith the rising barrel prices resulting inample export revenues. The country hasaccumulated foreign exchange reserves rep-resenting about nine months of imports. Aslight current account deficit could re-appearthis year amid strong import growth associ-ated with the investments planned. Foreigndebt relief expected in the Paris Club frame-work – with cancellation of up to 80 per centof foreign debt followed by rescheduling from2011 for the balance – should bring thecorresponding ratios to sustainable levelsfrom 2008.


348


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) −41.4 46.5 −0.7 6.2 1.3 7.1Inflation (%) 36.3 31.4 31.6 64.8 25.0 12.0Public sector balance (%GDP)(1) −42.0 −50.3 −17.0 −0.4 −1.4 −10.4Public sector balance(%GDP)(2) n/a n/a 10.9 12 1.5 −8.4Exports 9.3 17.8 19.8 28.4 34.1 36.3Imports 7.3 20.0 18.7 20.6 26.5 34.6Trade balance 2.0 −2.2 1.0 7.8 7.7 1.7Current account balance(1) 1.3 −12.0 −9.6 −1.6 −0.6 −3.7Current account balance (%GDP)(1) 10.8 −46.7 −30.6 −3.2 −1.0 −5.2Current account balance (%GDP)(2) −2.7 9.3 2 −3.2Foreign debt (%GDP) 1116.6 462.3 352.1 198.1 162.0 46.0Debt service (%Exports) 0 1.1 1.1 6.8 1.2 1.9Foreign exchange reserves (in months ofimports).

0 3.1 4.8 7.9 9.1 9.2

(1) = ex grants, (2) = inc grants, e = estimate, f = forecast

ISRAEL

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4

IsraelPopulation (million inhabitants): 7.0GDP (US$ million): 140,300


STRENGTHS• With an open and diversified economy,

Israel’s engagement in the OECDaccession process enhances its capacityto attract FDI.

• The country holds leadership positions intechnologically advanced andintermediate high value-added products.

• The workforce is highly skilled.• The country can count on the political

and financial backing of the UnitedStates and the Diaspora.

WEAKNESSES• Although declining, public sector debt is

still high.• The electoral scattering has resulted in

shaky government coalitions that oftencomplicate the drawing up of the budget.

• Exports are dependent on economicconditions in the United States.

• Failure to resolve the conflict with thePalestinians has fostered a climate ofinsecurity that weighs on the Israel’seconomic potential.

RISK ASSESSMENTBarely affected by the Lebanese war in 2006,strong economic growth – estimated at 5.4per cent – continued in 2007, driven byhousehold consumption, private investmentand foreign demand. Manufacturing indus-try production in the first nine months lastyear equalled the full-year output in 2006.The growth of high-and-medium-technologysectors was particularly strong, buoyed byincreased investment and robust foreigndemand. Business in the construction andtourism sectors (affected by the Lebanesewar) recovered in the third quarter after along period of weak growth. Unemploymentcontinued to ease. Inflation remained limitedwith the shekel appreciation against thedollar mitigating the effects of rising oilprices. In 2008, private demand underpinnedby the decline of unemployment will be themain growth engine. The export slowdownattributable to the shekel appreciation

against the dollar and the slowdown ofAmerican demand – already appreciable latelast year – should affect the economy, whichshould nonetheless be up 4.4 per cent. Thebusiness climate has remained good with theCoface payment incident index remainingbelow the world average.

The consolidation of government financesis well under way, but a decline in revenuesthis year due to the growth slowdown couldresult in a public deficit larger than in 2007.Despite deterioration of the current accountbalance, the external financial situation re-mains good, with the risk of a foreignexchange liquidity crisis manageable sincethe sources of external financing are rela-tively stable. The government coalition,meanwhile, remains weak and early parlia-mentary elections could take place before2010. A change in governments would, how-ever, be unlikely to jeopardise current eco-nomic policies.


350


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.5 4.8 5.2 5.2 5.4 4.4Inflation (%) 0.7 -0.4 1.3 2.1 0.2 2.2Public sector balance (%GDP) -6.9 -4.9 -3.1 -1.8 -1.0 -2.4Exports 30.2 36.7 40.1 43.7 48.6 52.1Imports 33.3 39.4 43.9 47.0 53.1 57.0Trade balance -3.1 -2.8 -3.8 -3.3 -4.5 -4.9Current account balance 1.4 3.1 4.3 8.0 6.1 5.2Current account balance (%GDP) 1.2 2.5 3.3 5.7 3.8 2.9Foreign debt (%GDP) 62.5 62.7 58.9 60.3 55.5 52.7Debt service (%Exports) 15.6 10.8 10.8 11.0 10.3 9.2Foreign exchange reserves (in months of imports) 6.1 5.5 5.2 4.9 4.5 4.3



■ Market overviewIsrael has a modern economy comparablewith that of a West European country:organised and honest judiciary, transparentretail sector, open public tenders conductedtransparently, efficient production appara-tus and skilled manpower. With per capitaGDP at an estimated €15,000, householdpurchasing power is similar to that in South-ern Europe. Israel’s economy is alreadylargely liberalised. Since 2005, the govern-ment has continued to pursue its policy ofopening market access in many areas, includ-ing the privatisation of Leumi and Discountbanks, postal services and refining compa-nies. This has been accompaniedbymeasuresto improve transparency in the capital mar-kets, reduce corporation tax and reformtaxation by lifting obstacles to Israeli invest-ment abroad. As a result, the Israeli marketoffers EU firms real opportunities in the formof ordinary business deals, direct investmentand joint ventures across all sectors of theeconomy.

■ Means of entryIsrael is one of the few countries in the worldto have a free-trade agreement with both theEU and the United States. Similar agree-ments have been signed with Canada,Mexicoand EFTA countries, while negotiations areunder way with Mercosur. Except for some

farm products, goods covered by major free-trade agreements may be imported intoIsrael duty-free. However, some consumergoods are liable to sales tax. Moreover,foreign bidders are often subject to offsettingarrangements under the public tender act,amounting to at least 28 per cent of thetender’s total value. Also, regulations inrespect of foreign workers have become morerestrictive.

■ Attitude towards foreign investorsDue to an ambitious infrastructure moder-nisation programme that is beyond the ca-pacity of the local financial market, a numberof measures are in place to encourage invest-ment, whether local or foreign. Foreign in-vestment is little regulated, except inprotected sectors such as defence and someutilities (telegraphic and some mail distri-bution services). There are also restrictionsin fixed telephony, wireless telecommunica-tions and tourism. Commercial paymentsbetween Israel and the outside world are freefrom restrictions, as are the transfer andrepatriation of profits, dividends and finan-cial receivables, after payment of Israelitaxes. While Israel has no investment protec-tion agreement with France, its adhesion toWorld Bank instruments and the OECDDeclaration on International InvestmentandMultinational Enterprises provides ade-quate protection.

ISRAEL

351

4


0

50

100

150

200

250

300

Dec-9

6

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDIsrael


352

OPPORTUNITY SCOPE



Mn USDMn USD


USA HongKong

Belgium Germany UK BelgiumUSA Germany UKSwitzerland

EXPORTS by products■ Pearls and precious stones 38%■ Advanced technology products 21% ■ Chemicals 17%■ Foodstuffs 3%■ Other 21%

■ Diamonds 21%■ Fuels 17%■ Transport equipment 16%■ Machinery and equipment 12%■ Chemicals 7%■ Foodstuffs 6%■ Other 22%

IMPORTS by products

0

5000

10000

15000

20000

0

1000

2000

3000

4000

5000

6000



Indicators Israel Regional averageEmergingcountry average


JORDAN

353

4

JordanPopulation (million inhabitants): 5.6GDP (US$ million): 14,176


STRENGTHS• The customs-free areas attract foreign

investment, and the free-tradeagreement with the United States spursexports.

• The country has made a sustained effortto improve the business climate.

• Remittances from expatriate workers,mainly employed in oil economies, havebeen a major source of foreign currencyrevenues.

• The country enjoys the political andfinancial backing of the internationalcommunity, which has, however, reducedthe amount of aid provided.

WEAKNESSES• With increased spending on oil

exacerbating financial imbalances,Jordan has remained dependent oninternational aid.

• A substantial trade deficit and highforeign debt expose the economy to acrisis of tourist and investor confidence.

• Regional geopolitical uncertainties tendto heighten social tensions in apopulation with mostly Palestinianorigins.

• Jordan’s natural resources are relativelylimited (phosphate and potassium).

RISK ASSESSMENTBenefiting from the regional boom, the Jor-danian economy grew strongly in 2007, upabout 6 per cent with domestic demand stillthe main economic engine driven by steadyemigrant worker remittances and privateinvestment. Except for the mining sector andagriculture, most sectors performed well.Finance and insurance, services, construc-tion, transport and communicationsachievedgrowth ranging from 8 to 11 per cent in thefirst half last year. In a still buoyant regionalenvironment underpinned by high oil prices,the economy should sustain 6 per cent growthin 2008. Reductions in subsidies since 2006,rising oil prices and the increasing cost offood product imports have generated infla-tionary pressures that should persist in2008.Although the banking system has beenhealthy, the rapid expansion of credit couldundermine portfolio quality.

Despite the good trend on exports and onremittances from emigrant workers, a signif-icant reduction in a still-excessive currentaccount deficit will be unlikely with oil pricescontinuing to rise. Financing needs should,however, remain largely covered by FDI,particularly from Gulf countries. Invest-ments have continued to trend up spurred byopportunities available in every sector andplans for privatisations. Investor confidencehas nonetheless remained vulnerable to de-terioration of the situation in an uncertainregional geopolitical environment.Thepublicdeficit, meanwhile, is estimated at 10 percent of GDP with increased spending on oilresulting in higher-than-expected subsidiesin 2007. Reduction of subsidies and obliga-tory spending in 2008 should facilitate reduc-ing the deficit to 7 per cent of GDP. Despitethe repeated deficits, active management ofpublic debt has made it possible to gradually


354

reduce its nonetheless still high level, repre-senting about 70 per cent of GDP. Highlyvulnerable to regional instability, the Hash-emite Kingdom enjoys the political and

financial backing of the Gulf countries andUnited States. Political stability should notbe in jeopardy.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.2 8.4 7.2 6.4 6.0 6.0Inflation (%) 1.6 3.4 3.5 6.3 5.7 6.0Public sector balance (%GDP)* -12.7 -12.6 -10.0 -7.1 -10.1 -7.0Exports 3.1 3.9 4.3 5.2 6.0 6.7Imports 5.1 7.3 9.3 10.2 11.6 12.9Trade balance -2.0 -3.4 -5.0 -5.0 -5.6 -6.1Current account balance (%GDP)(*) -0.2 -1.3 -3.0 -2.7 -3.0 -3.2Current account balance (%GDP) -2.2 -11.6 -23.6 -19.2 -18.9 -18.0Foreign debt (%GDP) 121.2 106.9 94.8 87.7 78.1 69.2Debt service ( %GS&T exports) 12.7 11.0 9.2 8.2 7.7 6.4Foreign exchange reserves (in months ofimports)

8.0 6.0 4.7 5.5 5.2 4.6

* = ex grants, e = estimate, f = forecast


■ Means of entryThe banking system is generally sound.Sincethe implementation of the new Banking Actin 2000, the bank of issue has furtherstrengthened prudential measures (com-pleted in June 2006), including higher baddebt provisions (60 days instead of 90) andgreater bank capitalisation. Jordanianbanksmust henceforth comply with Basel II crite-ria. The minimum capital requirement iscurrently JOD100 million (US$141 million).

Caution is called for when dealing withprivate Jordanian customers. While thereare still very few bankruptcies, cases of latepayment have been reported. Also, informa-tion on the creditworthiness of local firmsremains scarce. For example, there is still nosystem for informing bankers in real timeabout the sector’s total commitments to smallclients (no declaration requirement foramounts under JOD30,000, or US$42,300).Similarly, the banks have not been able toreach an understanding with the centralbank on the establishment of a credit bureau.But strides are being made towards greatertransparency. The central bank’s risk controlunit is doing a better job of collating client

information provided by the banks, despite atwo-month minimum waiting period for theinformation to be released. Given the fancifulnature of some declarations, exportersshouldcheck the credit history of potential custom-ers and gather key information about themfrom local market sources so as to avoidunreasonable risk.

■ Attitude towards foreign investorsThe Jordanian government continues to pur-sue its privatisation policy. Following a firstwave of privatisations (telecommunications,cement, banks and other services) between1999 and 2002, the second wave (potash,fixed and mobile telephony, railways, air-ports, post office, electricity, oil), currently inprogress, will draw new foreign operators.Total foreign investment in 2006 wasUS$3.12 billion, up more than 100 per centover the previous year. Such investment hasa stabilising and market-leading function.The rule is equality of treatment betweenforeign and local investors. As well as WTOmembership and the implementation of free-trade agreements with the United States,the countries of the Agadir agreement, Israeland GAFTA (Arab League) and an associa-tion agreement with the European Union

JORDAN

355

4

(which includes since end-July the applica-tion of PanEuroMed cumulationrules),struc-tural reforms to modernise the economy(Amman Stock Exchange, introduction ofVAT, industrial and intellectual propertyprotection, standards’ supervision by privateinternational bodies, health checks by theFood and Drugs Administration) are helpingto bring Jordan into line with Western

standards. The deteriorating regional politi-cal situation has, if anything, led Jordan toredouble efforts to attract foreign investorsvia sizeable tax benefits and preferentialaccess to the United States and Europeanmarkets. There is also a reciprocal invest-ment promotion and protection agreement,plus a double taxation treaty, between Jor-dan and France.


356

OPPORTUNITY SCOPE

BRAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS)


Mn USDMn USD


USA IndiaIraq SaudiArabia

Syria GermanySaudiArabia

China ItalyUSA

EXPORTS by products■ Manufactured goods 35%■ Chemicals 17% ■ Machinery and transport equipment 12%■ Crude materials 10%■ Foodstuffs 8%■ Other 18%

■ Machinery, transport equipment 27%■ Crude oil and petroleum products 23%■ Manufactured goods 21%■ Foodstuffs 12%■ Other 16%

IMPORTS by products

0

300

600

900

1200

1500

0

500

1000

1500

2000

2500

3000

3500



Indicators Jordan Regional averageEmergingcountry average


KUWAIT

357

4

KuwaitPopulation (million inhabitants): 2.6GDP (US$ million): 102,090


STRENGTHS• Kuwait’s wealth rests on extensive

reserves of oil and gas.• The fiscal surpluses systematically set

aside as reserves provide the countrywith steady financial income.

• Solid and well-supervised the bankingsystem has been among the region’s bestperformers.

• The Emirate has benefited from strategicalliances not only with the United Statesbut also with France, the UnitedKingdom and Russia.

WEAKNESSES• Parliamentary opposition to reforms has

impeded economic diversification.• Subsidies and administered prices have

resulted in waste and deterred privateinvestment.

• The country has not attracted much FDI.• Statistics underlying economic indicators

remain deficient, thereby complicatingrisk assessment.

RISK ASSESSMENTThe economic and financial outlook remainsbright and the business environment good.In 2008 as in 2007, public spending will drivethe economy, underpinned by oil with theprospect of ever-higher barrel prices. Theeconomy should continue to grow at a 5-percent clip, with the non-hydrocarbon sectormaintaining a strong rate (up between 6 and6.5 per cent) and offsetting moderate growthof about 2 per cent in the oil sector includingrefineries. Financial services, trading, trans-port and telecommunications continue totrend up. Improvements in infrastructureand electricity production should be pursued.The construction sector has been the leastdynamic in the region, with political discorddelaying large development projects (urban-ism communication and tourism). Buoyantdomestic demand and rising rental costshave 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 manyproducts. Removal of the dinar from its dollarpeg last May has helped limit importedinflation.

The Emirate enjoys an enviable financialsituation. In view of the high barrel pricesthe currency revaluation will be unlikely tosignificantly affect the public sector balance,which should continue to show a largesurplus this year estimated at 32 per cent ofGDP. External accounts have been compa-rably solid with a large trade surplus buoyedby oil exports supplemented by an invisiblesurplus resulting from investment incomeearned abroad whose strong growth hasexceeded the deficits in servicesandtransfersby a wide margin. The current accountbalance could represent about 50 per cent ofGDP in 2008, and Kuwait will thus be ableto continue to accumulate foreign assets.

After several reshuffles carried out underpressure from parliament, the political scenecould quieten down in 2008. Parliament’s


358

quasi-systematic opposition to reforms couldnonetheless still hamper growth and thecountry’s capacity to diversify. The national-ist currents in parliament have moreover

delayed ‘Project Kuwait’, which involves thedevelopment of heavy oils and requires tech-nological assistance frommajor internationalcompanies.


USD billions 2003/4* 2004/5 2005/6 2006/7(e) 2007/8(f) 2008/9(f)

Economic growth (%) 13.4 6.2 6.1 5.4 5.1 4.9Inflation (%) 0.9 1.1 4.1 3.0 4.5 3.9Public sector balance (%GDP) 16.3 22.1 37.3 34.8 33.0 32.5Exports 21.8 30.1 46.9 58.6 63.1 70.2Imports 9.9 11.7 14.2 14.3 18.3 20.0Trade balance 11.9 18.4 32.7 44.3 44.9 50.2Current account balance 9.4 18.2 34.1 51.0 54.2 62.8Current account balance (%GDP) 19.7 30.6 40.7 50.0 48.8 51.5Foreign debt (%GDP) 25.6 20.4 19.7 25.1 27.9 27.9Debt service (%Exports) 4.2 3.2 1.5 1.7 1.9 1.8Foreign exchange reserves (inmonths of imports)

4.7 4.4 4.0 5.1 8.2 9.4

* = fiscal year ending 31 March, e = estimate, f = forecast


■ Means of entryKuwait is a free and open market, with oneof the highest import to consumption ratiosin the world (around 90 per cent). It appliescustoms duty at a standard rate of 5 per centad valorem in line with the decision by thesix member countries of the Gulf Co-opera-tion Council (GCC) to standardise theircustoms duties. Exemptions may be grantedto specially designated projects. Per capitaincome is high and demand for capital andconsumer goods disproportionately large fora country of this size. The lifting of thesecurity threat from Iraq, swelling oil reve-nues and the arrival on the throne of amodernising emir have revived interest inlarge-scale projects with a multiplier effecton the economy. Kuwait, however, is a muchcoveted market demanding special knowl-edge and perseverance, backed by closecontact with ordering customers. Companiesexporting to Kuwait are not required to havea sole local partner and may sell directly toseveral Kuwaiti importers. While public pro-curement can be cumbersome and slow, thereare no particular difficulties to be met withprivate sector players. Leading Kuwaiti busi-

nessmen are active well beyond the bordersof the emirate.

■ Attitude towards foreign investorsSince the implementation in 2003 of FDIAct No. 8/2001, the government has intro-duced 100 per cent foreign ownership ofcompanies and 10-year tax exemption forforeigners. It has also drawn up a positivelist of sectors open to FDI, with the ex-ception of hydrocarbon exploration and pro-duction, which remain closed. Sectors thatare open include light processing industries,tourism, hotels, leisure (foreigners may ac-quire real estate for their projects), culture,information, marketing, livestock breedingand farming, health care, banking (BNPParibas was the first foreign bank author-ised to operate in the country), investmentmanagement and securities brokering, in-surance and information technology. At thesame time, cuts in corporation tax for for-eign companies from 55 to 15 per cent havebeen announced under the government’s taxreform programme. As part of its policy ofopenness, the government has undertakenor plans to undertake the privatisation ofa number of State-owned entities. The pri-vatisation of downstream oil activities (pet-

KUWAIT

359

4

rochemicals, petrol stations, tanker fleets)is a key priority, followed quickly by thatof the national airline, the post office, fixedtelephony and urban transport. As the

third-largest Gulf economy, Kuwait is a lu-crative and solvent market, underpinned byrobust growth, a buoyant economy and in-stitutional stability.


360

OPPORTUNITY SCOPE



Mn USDMn USD


Japan SingaporeSouthKorea

USA Netherlands JapanUSA Germany ChinaSaudiArabia

EXPORTS by products■ Crude oil 91%■ Other 9%

■ Consumer goods 37%■ Intermediate goods 28%■ Capital goods 18%■ Other 17%

IMPORTS by products

0

2000

4000

6000

8000

10000

0

500

1000

1500

2000

2500



Indicators Kuwait Regional averageEmergingcountry average


LEBANON

361

4

LebanonPopulation (million inhabitants): 4.1GDP (US$ million): 22,722

Country @rating: CMedium-term rating: Very high riskBusiness climate rating: B

STRENGTHS• Western and Arab capital in conjunction

with financial support from the Diasporahas allowed Lebanon to cushion theimpact of economic and financialdifficulties.

• Although the banking sector is thebackbone of the economy, it isnonetheless exposed to sovereign riskand dependent on depositor confidence.

WEAKNESSES• The country has been the epicentre of

regional geopolitical tensions thatexacerbate inter-community divisions.

• The political instability has impededimplementation of reforms that couldfacilitate attracting foreign capital andreducing both internal and externaldeficits.

• Public sector debt has been at a difficult-to-sustain level.

RISK ASSESSMENTLebanon is the theatre of regional geopoliti-cal tensions that affect the economy andaggravate an already shaky financial situa-tion. Despite these difficulties, however, com-panies have so far shown some resistance interms of payment behaviour. In 2007, aftertwo years of virtual stagnation, the politicalinstability and climate of insecurity, exacer-bated by the prospect ofyear-endpresidentialelections, stifled the economy’s capacity torebound. This situation affected householdconsumption, investment and tourism. Eco-nomic growth, drivenbyconstruction,despitethe slowdown of investment from Gulf coun-tries, and by robust banking activity rede-ployed in regional countries, did not exceed 2per cent. Unless tensions ease in 2008 thebusiness climate will remain not very con-ducive to a strong recovery.

Despite international aid, which has al-lowed the country to meet its commitments,sovereign default risk is still very high withpublic sector debt at a level difficult tosustain, particularly if the Lebanese pounddevalues, interest rates rise, or the country’smain source of financing – commercial banks– dries up. Although currently well capitali-sed, liquid and profitable, those banks arenonetheless still vulnerable due to theirsovereign risk exposure. The external ac-count situation, meanwhile, has remainedprecarious and vulnerable to a crisis ofinvestor confidence. The US$7.6 billion inaid promised at the January 2007 Parisconference should breathe new life into theeconomy, but its implementation will largelydepend on an easing of the political situationand a return of institutions to normal func-tioning.


362


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.1 7.4 1.0 0.0 2.0 3.5Inflation (%) 1.3 1.7 -0.7 5.6 3.5 2.5Public sector balance (%GDP) −13.3 −8.7 −8.5 −14.0 −15.8 −11.6Exports 1.7 2.1 2.3 2.8 3.2 3.6Imports 6.5 8.5 8.4 8.5 10.0 10.8Trade balance −4.8 −6.5 −6.1 −5.8 −6.8 −7.1Current account balance −2.8 −3.4 −3.1 −1.7 −3.1 −3.1Current account balance (%GDP) −13.9 −16.0 −14.2 −7.4 −13.0 −12.0Foreign debt (%GDP) 98.7 107.6 106.6 115.5 118.1 121.5Debt service (%GS&T exports) 34.1 36.8 46.2 35.7 32.0 31.9Foreign exchange reserves (in months ofimports)

8.9 6.9 7.0 7.9 6.9 7.3



■ Market overviewDespite renewed instability and the narrow-ness of the domestic market, Lebanon, withits highly enterprising businesspeople, offerscomparative advantages over its closestneighbours. Moreover, the country is strivingto create a more business-friendly environ-ment. The war in July–August 2006 affectedmany sectors of the economy. But reconstruc-tion funding and support from the Gulfcountries shouldhelpboost FDI inresidentialand tourist property developments. In othersectors, the steady upturn in investment canreasonably be sustained in the short termonly if the government manages to put anend to the political and institutional crisis. Itis vital to implement the reforms drawn upat the international donors’ conference heldin Paris in order to exploit what observersunanimously concur is the country’s im-mense growth potential.

At the centre of the Eastern Mediterra-nean, Lebanon is a meeting point betweenEurope, Asia and Africa. It also offers accessto some 300 million consumers, because ofits geographical and cultural proximity tothe Arab markets of the Middle East. It hassuccessfully developed expertise in finance,the print and audiovisual media,advertising,consultancy, engineering, IT solutions andhealth care on a scale that has little in

common with the size of its domestic market.Franchising, retail and services are growingat a fast pace. Flagship sectors includeready-to-wear clothing, luxury hotels, agri-foodsand mass retailing.

■ Means of entryLebanon stands out from its neighbours byvirtue of a highly developed and reliablebanking system – comprising some 58 banks– competently managed by the Bank ofLebanon, full convertibility of the dollar-pegged local currency (and a dollarised de-posit rate of 76.5 per cent in 2006) and theabsence of restrictions on capitalmovements.In 2000, the rates of customs duty on importswere slashed to between 0 per cent and 70per cent. The nominal tariff rate (ratio ofcustoms revenues to the value of imports)has since continued to fall, down from 16.6per cent in 2002 to 7.6 per cent in 2006.There are few non-tariff barriers. Such re-strictions as exist mainly consist of an importban on some 326 products or product catego-ries, import licences and permits for 261other product categories, and technical in-spections conducted on the basis of changingspecifications. Health regulations, thoughstill based on vague legal principles, arefairly liberal and comply with the recommen-dations of leading international organisa-tions.

All means of payment are accepted, al-though the irrevocable and confirmed letter

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of credit, denominated in euros or dollars, isthe most widely used instrument. Late pay-ment, especially of short-term contracts, isfairly rare. In the event of default, companiesusually avoid litigation due to the instabilityof the legal system and the opacity ofprocedures. The problem of bad debt is oftensorted out amicably. Disputes in connectionwith large contracts are best settled outsideLebanon through international arbitration,available since 2002 for government con-tracts as well.

■ Attitude towards foreign investorsLebanon has a modern legal system whichprotects the rights and assets of foreigninvestors and places few restrictionsonthem.In the absence of specific legislation, foreign-held companies are de facto subject to ordi-nary law in matters of trade, labour relationsand taxation. At 15 per cent, standardcorporation tax is among the lowest in theworld. Foreign companies enjoy all the pro-visions of the country’s Investment Promo-tion Act, adopted in August 2001, which,among other things, empowers the govern-ment one-stop shop, IDAL (Investment De-

velopment Authority in Lebanon), to handleand facilitate their administrative formali-ties. Under this act, whose implementingdecrees were passed in early 2003, all localand foreign businesspersons investing indesignated underprivileged areas or keysectors (tourism, manufacturing, agri-foods,agriculture, telecommunications and infor-mation technology) are entitled, under cer-tain conditions, to total or partial taxexemption according to the amount invested,the number of jobs created, the impact on theeconomy and the environment and the typeof technology transferred. Lebanon is striv-ing to create a business-friendlyenvironmentboth through IDAL and through the adoptionof new pro-business measures, such as thoseannounced in spring 2007 (company incor-poration formalities to be cut to a maximumof six days (against 46 days at present),halving administrative charges via free pro-vision of standard documents, establishmentof a one-stop shop at LibanPost offices).France and Lebanon signed a reciprocalinvestment protection and promotion agree-ment in 1996, which has been in effect since1999.


364

OPPORTUNITY SCOPE



Mn USDMn USD


Syria SwitzerlandUAE SaudiArabia

Turkey ItalySyria USA GermanyFrance

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%

■ 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%

IMPORTS by products

0100200300400500600700800

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Indicators Lebanon Regional averageEmergingcountry average


LIBYA

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LibyaPopulation (million inhabitants): 6.0GDP (US$ million): 50,320

Country @rating: CMedium-term rating: High riskBusiness climate rating: D

STRENGTHS• Normalisation of relations with the

United States and Europe has opened upopportunities for foreign investment thatthe country needs.

• The oil and gas reserves offer greatdevelopment potential that shouldbenefit the entire economy.

• The start of banking system reform is apositive signal for investors.

• Libya’s archaeological wealth andgeographic location constitute assets inthe development of tourism.

WEAKNESSES• With the government’s economic options

still not very clear, reform has been slowto get started in a state-controlledeconomy lacking diversification.

• A complex bureaucracy and a lack ofinfrastructure have impededdevelopment of a private sector.

• Economic indicators are often deficientand not very reliable.

• The business climate suffers from a lackof corporate transparency and frominstitutional deficiencies.

RISK ASSESSMENTLibya is in solid financial health and shouldcontinue to run current account and fiscalsurpluses in 2008, thanks to the high oilprices. With foreign debt remaining limited,foreign exchange reserves representing over30 months of imports have sheltered thecountry from a liquidity crisis.

Already strong economic growth acceler-ated in 2007 and should reach about 7 percent up from slightly over 5 per cent a yearearlier. Expanding 7.5 per cent the non-oilsector was the main economic engine, fuelledby public spending. Civil service wage in-creases spurred household consumption,while public sector investment spendingcontributed to the improvement in infra-structure and services. The estimated 4.8 percent increase in hydrocarbon production ispartly attributable to the progressive reha-bilitation of old oil rigs that deteriorated

during the years of embargo. With the strongnon-oil growth continuing in 2008, an 11 percent increase in oil production capacityshould spur overall economic growth, whichcould be near 9 per cent. Rising prices,especially for consumer goods but also forraw material and housing, generated infla-tionary pressures that could persist in 2008.

Although the economy lacks diversifica-tion, the prospects for its development haveimproved with Libya no longer isolatedpolitically or in trade terms on the interna-tional scene. Although the country has at-tracted foreign investment, it has remainedconcentrated in the oil sector and the con-struction of tourism infrastructure. As re-flected by the Coface business-climaterating,the Libyan business environment is not veryconducive due to institutional weaknesses,which can be responsible for late paymentsand collection difficulties.


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USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.9 5.0 6.3 5.2 6.8 8.8Inflation (%) -2.1 -2.2 2.0 3.4 7.0 8.0Public sector balance (%GDP) 14.8 17.4 30.0 39.1 34.7 33.7Exports 14.5 20.6 31.3 39.2 44.5 60.6Imports 7.2 8.8 11.2 12.9 18.6 25.3Trade balance 7.3 11.8 20.1 26.3 25.9 35.3Current account balance 5.0 7.8 17.4 24.2 19.5 28.6Current account balance (%GDP) 21.0 25.5 41.7 48.7 33.2 37.5Foreign debt (%GDP) 23.3 18.0 13.5 11.8 10.6 8.8Debt service (%Exports) 4.6 3.7 2.9 2.5 2.4 1.9Foreign currency reserves (in months of imports) 19.8 20.8 26.2 37.5 33.7 37.1

e= estimate, f = forecast


■ Market overviewForeign investment is encouraged by law No.5, and its implementing decrees in theagricultural, services, manufacturing,healthcare and tourism sectors. The minimumcapital requirement, under Decree 86 of April2006, is LYD5 million (around €8 million).Where the local stake in a project is equal toor more than 50 per cent, this threshold islowered to LYD2 million (about €3.2 million).Significant investment programmes are un-der way to improve transport infrastructureand equipment (air, land), expand telecom-munications to 2.5 million fixed line and 3million GSM subscribers, step up electricityproduction and generating capacity from4,500MW today to 10,000MW by 2020, anddevelop oil and gas production and explora-tion with a view to increasing output to 3million barrels daily by 2015. Other projectsinclude large-scale river development (watersupply), desalination (installation of 11plants), the environment, radio and televi-sion (digitisation of equipment and training),expansion of the agri-foods industry, housingand health care. Libya offers a host of newbusiness opportunities, despite a widespreadsystem of state controls, characterised bycumbersome, slow and inconsistent admin-istrative practices. To celebrate the 40thanniversary of the revolution in September2009, almost $80 billion worth of infrastruc-ture projects were initiated in 2007.

■ Means of entrySince early 2003, licences to import goodsinto the country have been lifted. However,each shipment must be accompanied by acertificate of origin. Libya switched its cus-toms tariff to the simplified harmonisednomenclature in January 1998. An importban is in place for 17 so-called ‘luxury’ orlocally manufactured products (list availa-ble). Customs duties on imported goods wereabolished on 1 August 2005 and replaced by4 per cent ‘port services tax’ payable byLibyan importers on all but 85 products.Importers are also liable to 2 per centproduction tax and 25 or 50 per cent con-sumption tax. Sales contracts are settledexclusively by irrevocable letter of credit,which can take up to six months to open. Thelaw governing contracts with Libyan govern-ment agencies requires foreign suppliers topay 2 per cent stamp duty on the total valueof the contract (1 per cent for sub-contractingagreements). The Libyan market should onlybe approached by financially sound compa-nies used to lengthy negotiations. Certaingoods (vehicles, motorcycles, office equip-ment, electrical appliances, electronic equip-ment, roadworks and quarry equipment,farm machinery) may not be sold withoutentering into a representation agreementwith a Libyan agent responsible for aftersales service. SMEs can usefully engage inordinary business not requiring funding. TheAnnual Tripoli International Trade Fair in

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April is an excellent showcase for trade andbusiness.

■ Foreign exchange regulationsThe country’s foreign exchange regulations,more flexible than in the past, are overseen

by the Exchange Control Department, anarm of the central bank. Since 16 June 2003,the Libyan government has successfullymaintained a free exchange rate system onthe currency market based on a single rate(€1 = LYD1.6).


368

OPPORTUNITY SCOPE



Mn USDMn USD


Germany SpainItaly USA France GermanyItaly China FranceTunisia

EXPORTS by products■ Fuels 97%■ Other 3%

■ Machinery and transport equipment 48%■ Materials 21%■ Foodstuffs 17%■ Chemicals 6%■ Other manufactured products 9%

IMPORTS by products

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Indicators Libya Regional averageEmergingcountry average

GNP per capita (PPP dollars) 8,550 7,746 5,983GNP per capita (USD) 7,380 4,167 2,313Human Development Index 0.798 0.716 0.672Wealthiest 10% share of national income n / a n/a 27 31Urban population percentage 85 59 44Percentage under 15 years old 30 32 30Number of computers per 1,000 inhabitants n/a 92 50

MOROCCO

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MoroccoPopulation (million inhabitants): 30.5GDP (US$ million): 57,307


STRENGTHS• The country enjoys significant assets

including proximity to the Europeanmarket, natural resources, vast touristpotential and political stability.

• Its geographic location and the size of itsmarket (31 million inhabitants) havemade Morocco an ideal base for settingup industries seeking to conquer theNorth African market.

• Specialisation in quality textileproduction has enabled the country tomeet Chinese competition, which hasintensified since the multifibreagreement expired in January 2005.

• Morocco has been specialising inoffshoring remote high value-added ITservices.

• Consolidation of the banking system hascontributed to improving the businessenvironment.

WEAKNESSES• Still underpinned by an agricultural

sector representing 14 per cent of GDPand employing 40 per cent of thepopulation, the Moroccan economyremains vulnerable to weatherconditions.

• Economic growth still does not suffice tomeet the expectations of the population,with poverty and unemployment,particularly of youth, constitutingsources of social tensions.

• The unresolved West Sahara problem,which has affected relations withAlgeria, has limited the benefits Moroccocould derive from development ofregional integration.

• A tourist sector that generates revenuescrucial to current account balance andeconomic growth remains vulnerable tothe threat of terrorism.

RISK ASSESSMENTGDP growth slowed markedly in 2007 in thewake of a pour harvest season. Supposingbetter weather conditions growth shouldrebound to almost 6 per cent in 2008, drivenby transport and tourism infrastructure in-vestment, textile exports and a consumptionrecovery in rural areas. Inflation meanwhileshould remain below 2.5 per cent, kept undercontrol by the central bank’s restrictivemonetary policy. A Coface payment incidentindex remaining near the world averagereflects that bright outlook.

This favourable context should facilitate anew overhaul of public finances without

jeopardising the ambitious investment pro-grammes in transport, housing, health andeducation. Conversely, a trade balance un-dermined by the costs of energy and capitalgoods imports could widen further shouldthe euro zone prove less dynamic thanexpected. Tourism revenues and expatriateremittances should make it possible to main-tain a current account surplus, further re-ducing the foreign debt burden. Morocco’slimited financing needs and very ampleforeign exchange reserves will limit theexposure to exchange-rate risk.

In the September 2007 legislative elec-tions, which were marked by a low turnout,


370

against all expectations a party in the gov-ernment coalition, Istiqlal, strengthened itsposition in the Chamber opposite the mod-erate Islamist Justice and DevelopmentParty, that had been favoured to win due toits campaign focus on combating poverty andunemployment. King Mohammed VI has

thus emerged with a stronger position. Inthis context, efforts on reforms focused ondiversifying the economic fabric and improv-ing the business environment should con-tinue and the terrorist risk unlikely tojeopardise socio-political stability.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.1 5.2 2.4 8.0 2.5 5.9Inflation (%) 1.2 1.5 1.0 3.3 2.5 2.0Public sector balance (%GDP) -4.4 -4.1 -5.2 -2.1 -2.5 -2.4Exports 8.8 9.9 11.2 12.7 14.4 15.9Imports 13.1 16.4 19.1 21.8 25.6 28.1Trade balance -4.3 -6.5 -7.9 -9.1 -11.2 -12.2Current account balance (%GDP) 3.2 1.7 2.4 3.4 1.8 1.5Foreign debt (%GDP) 31 27 25 23 22 20Debt service (%Exports) 20.8 15.8 13.6 11.2 10.0 8.8Foreign exchange reserves (in months of imports) 9.7 9.3 8.1 9.0 9.1 9.0



■ Means of entryBut for a handful of import licences still inexistence, almost all sectors of the Moroccaneconomy are open to foreign investment andimports, and there is no obligation to teamup with a local partner. Morocco has alreadyundertaken substantial tariff dismantling.The WTO bound rate is 41.3 per cent, theaverage applied rate is 24.5 per cent and theimport-weighted average rate is 18.9 percent. However, tariff peaks remain – up to329 per cent for some farm products and upto 50 per cent for some industrial goods.

European products benefit from tariff dis-mantling under the EU-Morocco associationagreement. This agreement, which aims toestablish a free-trade area by 2012, hasalready abolished import duties on half theindustrial tariff lines. For the so-called sen-sitive industrial goods manufactured locally,tariffs will be gradually eliminated by 2012.

Wide-ranging reforms over the last fewyears have helped improve the businessclimate. Numerous laws complying withinternational standards have been adopted.Key measures include new trade legislation

(1996), the establishment of commercialcourts (1997), modernisation of company law(1997 and 2001), a new Customs Code (2000),competition and price legislation, an intellec-tual and industrial property protection law(2004 and 2006), a literary and artisticproperty law (in force since January 2001)and labour and insurance codes (2004). Withregard to public−private relations, a dele-gated management law was passed in 2006,and government procurement legislationwasrevamped in 2007.■ Attitude towards foreign investorsThe overall framework for foreign invest-ment is set out in the Investment Charter.The charter contains a series of incentivesdesigned to reduce investment costs. One-stop business start-up shops have also beenestablished. They operate as regional invest-ment centres, overseen by Walis (prefects).As a result of this measure, company incor-poration formalities now only take around10 days. The centres also provide investmentadvice.■ Foreign exchange regulationsThe exchange rate system continues to beadministered. The exchange rate is set by

MOROCCO

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4

the Central Bank, Bank Al Maghrib, on thebasis of a basket of currencies. The dirhamis convertible for ordinary business transac-tions (imports and exports). A currency

convertibility system, set up in 1992, allowsforeign investors to repatriate capital, profitand income.


0

50

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June 9

3

Dec-9

3

June 9

4

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4

June 9

5

Dec-9

5

June 9

6

Dec-9

6

June 9

7

Dec-9

7

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8

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8

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9

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9

June 0

0

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0

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1

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1

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2

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3

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4

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Dec-0

5

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6

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6

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7

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7

WORLDMorocco


372

OPPORTUNITY SCOPE

DOWN OF DOMESTIC DEMAND (%GDP + IMPORTS)


Mn USDMn USD


France UKSpain Italy India SpainFrance SaudiArabia

ItalyChina

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%

■ Consumer goods 22%■ Semi-finished goods 24%■ Capital goods 21%■ Fuels 23%■ Foodstuffs 9%

IMPORTS by products

0

500

1000

1500

2000

2500

3000

0

1000

2000

3000

4000

5000



Indicators Morocco Regional averageEmergingcountry average


OMAN

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4

OmanPopulation (million inhabitants) 2.6GDP (US$ million) 35,666


STRENGTHS• Open and relatively diversified

(development of the gas, manufacturingand tourism sectors), the economyconstitutes a favourable environment forinvestment.

• The free-trade agreement with theUnited States has spurred exports tothat country.

• An oil reserve fund is intended toconstitute savings for future generationsand cushion shocks should barrel pricesdecline.

• The privatisation programme shouldcreate new opportunities for investors.

WEAKNESSES• The oil fields are mature, and costly

investments will be necessary to restoreproduction capacity.

• Remaining dependent on oil revenues,the economy is vulnerable to sharpdeclines in barrel prices.

• With the domestic workforce notsufficiently skilled, the country has beendependent on foreign labour whose costhas been rising.

• Domestic unemployment remains highdespite the GDP growth and the’Omanisation’ of employment will taketime.

RISK ASSESSMENTThe economy has been dynamic, benefitingfrom liberal measures and good market li-quidity buoyed by barrel prices. The non-oilsector has continued to grow at a rapid clip in2007, estimated at 9 per cent, driven by in-vestment, public spending and private con-sumption. Manufacturing, construction andservices, especially wholesaling and retail-ing, still achieved excellent performance.Theoil sector, conversely, suffered a further de-cline estimated at 1.8 per cent, with the solidgrowth of gas production (up 6.5 per cent inthe first half) only partly offsetting the 5.4-per-cent decline in crude production. Overalleconomic growth in 2007 is estimated at 6.5per cent. In 2008, the start-up of manufac-turing facilities and especially of additionaloil and condensate production capacityshould result in higher GDP growth, whichcould reach 9.3 per cent. The market liquidityand the increasing cost of construction prod-

ucts and materials heightened inflationarypressures, which have nonetheless remainedunder control via the continuation of subsi-dies. Although the banking sector is well cap-italised and profitable, the rapid expansionofcredit will bear watching.

Despite increasing debt, the external fi-nancial situation remains healthy withOman accumulating foreign assets. Higheroil prices and export volumes in 2008should result in an increase in the tradesurplus. Despite a larger invisibles deficit,resulting notably from the increase in serv-ice payments and transfers abroad by ex-patriate workers, the current accountsurplus could reach a level equivalent to12 per cent of GDP. The oil revenues more-over give the government substantial roomfor manoeuvre to improve infrastructureand invest in the health and educationsectors while still accumulating savings forfuture generations.


374

Despite regional geopolitical tensions andthe uncertainties over the succession to theSultan, Oman’s political stability has been

reassuring to investors. In this context,the business environment has remainedbuoyant.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.0 5.4 5.8 6.1 6.5 9.3Inflation (%) −0.4 0.4 2.0 3.0 3.8 3.7Public sector balance (%GDP) 1.5 4.8 12.4 14.2 10.1 12.5Exports 11.7 13.4 18.7 21.6 22.4 26.3Imports 6.1 7.9 8.0 9.9 11.1 12.4Trade balance 5.6 5.5 10.7 11.7 11.3 13.9Current account balance 1.5 0.6 4.7 4.4 3.4 5.2Current account balance (%GDP) 6.7 2.3 15.3 12.3 8.9 12.0Foreign debt (%GDP) 19.3 21.4 21.0 25.0 26.7 26.6Debt service (%Exports) 10.4 9.2 6.7 5.5 5.2 4.4Official foreign exchange reserves (in months ofimports)

3.9 3.1 3.4 3.1 4.3 4.6



■ Market overviewWhile the Omani economy’s dependence onthe hydrocarbon sector remains strong(about 50 per cent of GDP in 2006), it isfalling due to the steady decline in oilproduction. The government is keen to in-crease private-sector participation in theeconomy via wider privatisation of state-owned enterprises and public services andwill not be deflected from pursuing theOmanisation of jobs. Economic diversifica-tion and reducing unemployment constitutethe major challenges facing the economy.

■ Means of entryFor private contracts, exporters of consumergoods not demanding after-sales service arenot required to be represented by a localagent. On the other hand, when bidding forinternational open tenders, foreign suppliersare strongly advised to have a local office orbe represented by an Omani company, eventhough this is not a formal requirement.Standard customs duty for the majority ofproducts is 5 per cent of the CIF value. Somegoods are subject to prior licensing ongrounds of health, religion or protection oflocal manufacture. There are no exchangecontrols and foreign currency is freely sold.

There are no restrictions on profit transfers,nor any impediments to the free movementof capital.

■ Attitude towards foreign investorsOmani legislation tends to encourage foreigninvestment in industrial and infrastructureprojects, especially in connection with theprivatisation programme but maintains anumber of sector restrictions. Foreigners cannow acquire a stake in manufacturing, trad-ing and service companies. Foreign compa-nies looking to open a representative officein the Sultanate are not required to have alocal sponsor, provided they have been reg-istered for 10 consecutive years in the traderegister of the country where their head officeis based. The condition requiring a parentcompany to have three subsidiaries in threeforeign countries was scrapped in 2005. Taxincentive schemes have also been introducedto reduce discrimination against foreigncom-panies and encourage local companies toopen their capital to foreigners. The recentconclusion of a free-trade agreement withthe United States should lead to greaterrelaxation of local human resources regula-tions. The agreement’s implementation willspeed up moves towards more investment-friendly labour and company laws.

OMAN

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4

OPPORTUNITY SCOPE



Mn USDMn USD


China JapanSouthKorea

Thailand SouthAfrica

JapanUAE USA IndiaGermany

EXPORTS by products■ Crude oil 64%■ Other fuels 22%■ Petroleum re-exports 9%■ Other 5%

■ Machinery and transport equipment 49%■ Manufactured goods 17%■ Foodstuffs 9%■ Iron and steel 7%■ Fuels 4%■ Other 15%

IMPORTS by products

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1000

2000

3000

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Indicators Oman Regional averageEmergingcountry average



376

Palestinian TerritoriesPopulation (million inhabitants) 3.7GDP (US$ million) 4,059

RISK ASSESSMENTThe economy of the Palestinian Territorieshas suffered in a complex political situationand remains dependent on transfusions ofinternational aid. In the first half last yearthe situation remained marked by furtherdeterioration of the economy and the perva-sive climate of insecurity, verging on civilwar in the Hamas-controlled Gaza Strip. Thecrisis of confidence vis-a-vis the PalestinianIslamist Party and the new government thatresulted from the March 2006 legislativeelections prompted Israel to strengthentravel restrictions and to freeze taxes col-lected on behalf of the Palestinian Authority(transfers that represent some 2/3 of itsresources). International aid was moreoverlargely suspended. The collapse of revenuessqueezed public spending, particularly oncivil service wages. The asphyxiation of theeconomy resulted in a recession estimated at8 per cent in 2006.

After Hamas took control in the Gaza Stripin June 2007, President Mahmoud Abbaswithdrew to the West Bank, dissolved the

coalition government and formed a newgovernment. The Gaza Strip remained iso-lated while the situation in the West Bankdeveloped along more favourable lines withthe lifting of the financial blockade restoringroom for manoeuvre to revive the economyand ultimately resulting in renewed con-sumer confidence in an improved securityenvironment. That favourable trend in thesecond half sufficed to stem the recession forall the territories. The brighter economicoutlook will continue this year. The reformsimplemented by the government of SalamFayyad, especially as regards national ac-counts, are considered satisfactory by theIMF and will foster transparent manage-ment of the international aid mobilised end2007 with donor countries promising US$7.4billion to allow the territories to meet theircurrent spending needs and rebuild infra-structure. The economic reconstruction willnonetheless remainsubordinate to theeasingof political tensions. Although the AnnapolisConference revived the peace process, asuccessful conclusion by end 2008 seemshardly likely.

PALESTINIAN TERRITORIES

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4


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.1 6.2 6 -8 0 3.5Inflation (%) 4.4 3 3.6 3.6 1.5 3.2Unemployment (%) 25.6 26.8 23.5 23.6 22.4 23.1Public sector balance (%GDP)(1) -14.6 -14.1 -17 -26.4 -28.4 -23.8Public sector balance (%GDP)(2) -7.4 -5.4 -9 -9.7 -9.6 2.5G&S exports (%GDP) 47.4 59 0.6 0.7 0.8 0.8G&S imports (%GDP) 78.5 80.4 80.3 79.1 79.7 79.9Current account balance (%GDP)(1) -31.1 -21.4 -79.7 -78.4 -78.9 -79.1Current account balance (%GDP)(2) -16.7 -21.3 -20.1 -8.6 -9 -3.4Public sector debt n/a n/a n/a n/a n/a n/a

(1) = ex grants, (2) = inc grants, e = estimate, f = forecast


378

QatarPopulation (inhabitants): 827,533GDP (US$ million): 52,720


STRENGTHS• The world’s third largest reserves of gas

plus significant oil reserves offerconsiderable development potential withQatar already the world leading exporterof liquefied natural gas.

• Productive-fabric development and thehigh oil prices have spurred rapideconomic growth with per capita incomeamong the world’s highest.

• Foreign debt is largely secured by long-term export contracts.

• Besides the downstream oil and gasindustries, the economy has beendiversifying in many sectors (finance,education and tourism) with FDI and thedevelopment of smaller companiesencouraged.

• Diversification strategy based oninvestment abroad fosters the acquisitionof know-how.

WEAKNESSES• With fiscal resources lacking

diversification, the economy remainsdependent on oil revenues.

• The economic expansion has depended onincreasingly costly foreign labour withlocal labour lacking the requisite skills.

• The country has been vulnerable todeterioration of the regional geopoliticalsituation.

• The statistics underlying economicindicators have remained deficienthampering the assessment of risks.

• Weaknesses that have emerged in theNorth Field could increase gas extractioncosts.

RISK ASSESSMENTThe economy has been growing strongly,driven by investment and household con-sumption which have benefited from thehigh-income levels and rapid populationgrowth. In 2007, an estimated 9.5 per centincrease in hydrocarbon production wasmainly attributable to the 14 per cent growthachieved in gas production. Excluding hydro-carbons, growth slowed (up 7 per cent) afterthe rapid growth of about 10 per centmaintained for several years in the run-upto the Asian games held in 2006. Bottlenecksand rising costs particularly affected con-struction. Services, such as retailing and

financial services, have however remainedbuoyant. The overall growth rate came to anestimated 8.3 per cent.

Growth should accelerate thisyear to reach13 per cent driven by an expected 34 per centincrease in gas production attributable es-pecially to the start up of the Dolphin gaspipeline to the United Arab Emirates.

After peaking in 2006, inflationary pres-sures should remain strong amid high rentalprices and the rising cost of imported prod-ucts due partly to the weakening of the dollar.Although the banking system is well capital-ised, the rapid growth of property loans andconsumer credit will bear watching.

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4

The external financial situation has beenhealthy. Imports have been growing stronglyin connection with investments under wayand rising product costs. The high oil pricesand the increase in the volume exported willnonetheless result in large surpluses espe-cially this year. Gas exports should moreoverequal those of oil. Although still high, theforeign debt burden has been declining. Thecountry has attracted foreign investment

and accumulated financial holdings abroad.The public sector should continue to runlarge financial surpluses providing room formanoeuvre in carrying out industrial andinfrastructure projects.

Despite regional geopolitical uncertain-ties, the business climate has remainedbuoyant underpinned by domestic politicalstability.


(USD billions) 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.4 11.8 8.2 9.0 8.3 13.2Inflation (%) 2.3 6.8 8.8 11.8 9.5 8.2Public sector balance (%GDP) 4.0 15.2 8.7 4.7 8.8 14.3Exports 13.4 18.7 25.8 32.2 37.4 48.3Imports 4.4 5.4 9.1 14.4 16.6 19.9Trade balance 9.0 13.3 16.7 17.7 20.8 28.4Current account balance 5.8 7.5 10.7 9.5 11.3 17.6Current account balance (%GDP) 24.4 23.9 25.4 18.0 18.7 26.1Foreign debt (%GDP) 58.1 48.1 45.6 42.7 41.5 43.0Debt service (%GS&T exports) 23.5 9.4 7.4 7.6 7.6 6.6Foreign exchange reserves (in months of imports) 3.5 3.1 2.8 2.3 2.4 2.5



■ Market overviewThe Qatari market is free and open to trade,except for imports of live cattle and bovineproducts of European origin (BSE outbreak).There is also free movement of goods betweenthe six countries of the CCASG since theintroduction of a customs union in January2003. Imports into Qatar, however, are sub-ject to rules of origin that vary according tocountry. Local sponsorship is required todistribute and market imported goods butnot to bid for public tenders. Trademark andintellectual property protection legislation isrelatively recent. A new implementingdecree(law No. 18 of 2007) imposes three to fiveyears imprisonment and fines ranging from€20,000 to €200,000. Qatar has been asignatory to the Geneva Convention (indus-trial property) and the Bern Convention(intellectual property) only since 5 July 2000.Consequently, the country still lacks essen-

tial human resources to enforce and imple-ment this legislation on a systematic basis.

■ Means of entrySince 1 January 2003, all goods are liable to5 per cent ad valorem duty under the GCCcustoms union, except products directly com-peting with local manufacture (steel: 20 percent), products taxed on grounds of health(cigarettes: 100 per cent) or those banned byIslam (wines and spirits: 100 per cent). Toencourage the construction sector, in August2007 the government suspended customsduty on construction materials (steel, ce-ment, gravel) for three years. Exportersshould demand the irrevocable and con-firmed letter of credit in transactions withlocal customers as it is the most widely usedmeans of payment in Qatar. Public procure-ment contracts are paid for in cash.

■ Attitude towards foreign investorsRegulations governing foreign investmentwere relaxed under a new law passed on 16


380

October 2000. Subject to certain conditionsto be defined on a case-by-case basis with theauthorities, foreign investors can now own a100 per cent stake in a company operating inthe agricultural, manufacturing, healthcare,education, tourism and energy sectors. Ap-provals are handled by the Ministry ofEconomic Affairs and Trade and, for indus-trial projects, by the Ministry of Energy andIndustry. The only precondition is that theforeign investment comply with the govern-ment’s development plans. Sectors fallingoutside the scope of this law are banking,insurance, property and retail. Foreignersinvesting in these sectors are required tohave a majority Qatari partner with a mini-mum 51 per cent stake. The Qatar FinancialCenter set up in Doha on 1 May 2005 acceptsforeign banks and financial services compa-nies without a local partner, as well asservice companies engaged in activities re-lated to LNG transportation.

Similarly, foreign research and develop-ment laboratories can operate out of Doha’s

Science and Technology Park under the freezone status awarded to it in September 2005.Foreign investors can acquire leaseholds fora maximum period of 50 years on a renewablebasis but are barred from acquiring freeholdproperty, except in the building complexunder construction on the artificial islandcalled Pearl Island, and in the new zoneswhose location is a hot topic of debate in thelocal community. Disputes between a foreigninvestor and a local party are subject to localor international arbitration. Foreigners arerequired to have a Qatari sponsor whenapplying for a residence permit linked to awork permit. Foreign access to the DohaStock Exchange, inter alia via mutual funds,has been opened up following the govern-ment’s announcement in May 2004 to allowforeigners to own up to 25 per cent of listedcompanies. The Ministry of Economic Affairsand Trade grants wholly foreign-funded pro-jects 10-year tax relief, together with exemp-tion from customs duties on importedequipment, raw materials and semi-finishedgoods not available locally.

QATAR

381

4

OPPORTUNITY SCOPE



Mn USDMn USD


Japan SingaporeSouthKorea

Thailand Spain JapanFrance USA GermanyItaly

EXPORTS by products■ Crude oil 58%■ Liquified natural gas 31%■ Petrochemicals 8%■ Natural gas liquids 3%■ Other 1%

■ Machinery and transport equipment 49%■ Manufactured goods 35%■ Foodstuffs 6%■ Other 10%

IMPORTS by products

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6000

9000

12000

15000

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500

1000

1500

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Indicators Qatar Regional averageEmergingcountry average

GNP per capita (PPP dollars) 39,610 7,746 5,983GNP per capita (USD) n/a 4,167 2,313Human Development Index 0.844 0.716 0.672Wealthiest 10% share of national income n/a 27 31Urban population percentage 94 59 44Percentage under 15 years old 22 32 30Number of computers per 1,000 inhabitants n/a 92 50


382

Saudi ArabiaPopulation (million inhabitants): 23.7GDP (US$ million): 309,778

Country @rating: A4Medium-term rating: Quite low riskBusiness climate rating: B

STRENGTHS• By virtue of its extensive oil reserves,

Saudi Arabia occupies a strategicposition in the markets.

• With this strategic position and itsregional economic and political influence,the kingdom has enjoyed a privilegedrelationship with the United States.

• Admitted to the WTO end 2005, thecountry has been opening up to foreigninvestment.

• 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 asadjustment variable for world demandand OPEC policy.

• Conservatism has impeded political andeconomic liberalisation.

• Rapid demographic growth and a pooreducation system have spawned highunemployment that poses a threat to thesocial climate.

• Regional geopolitical instability hasaffected the investment environment.

RISK ASSESSMENTAdjustments of oil production to externaldemand contributed to the emergence of anew growth slowdown in 2007. The non-oilsector, meanwhile, continued to grow stead-ily at a high 6.5 per cent rate with high barrelprices generating the revenues spurring do-mestic demand and both public and privateinvestment in major industrial and infra-structure projects. In 2008, while hydrocar-bon production could register a smallincrease, investment and public spendingwill continue to drive the economy. But itcould be less dynamic. A more difficult andexpensive funding coupled with the risingcost of materials could lead to some projectsbeing delayed. An estimated 5 per cent

growth recovery should nonetheless developwith the petrochemical, construction andtransport sectors continuing to outperform.With companies making good profits, theCoface payment incident index has remainedbelow the world average.

The excellent conditions in the oil marketsince 2003 enabled the Kingdom to bolsterits financial situation notably by accumulat-ing financial assets and sharply reducingpublic sector debt. The economy has thusbecome less vulnerable to a decline in barrelprices. Since the country’s admission to theWTO end 2005, the investment environmenthas moreover improved. Investment contin-ues to underperform, however, amid persist-ent weaknesses in governance terms.

SAUDI ARABIA

383

4


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.7 5.3 6.1 4.3 3.1 5.0Inflation (%) 0.6 0.3 0.7 2.3 3.7 3.9Public sector balance (%GDP) 4.5 11.4 18.0 21.4 15.4 13.5Exports 93.2 126.0 181.5 209.2 212.1 233.4Imports 33.9 41.1 54.5 60.7 72.8 84.5Trade balance 59.4 85.0 127.0 148.5 139.3 148.9Current account balance 28.0 51.9 91.0 94.8 78.9 82.6Current account balance (%GDP) 13.0 20.7 29.4 27.1 21.7 21.2Foreign debt (%GDP) 11.6 11.1 10.9 12.9 14.9 15.8Debt service (%Exports) 4.0 3.2 2.6 2.7 2.8 2.7Foreign exchange reserves (in months ofimports)

3.7 3.9 3.1 2.6 2.3 2.1



■ Market overviewWith domestic GDP accounting for 55 percent of aggregate Gulf Co-operation Council(GCC) GDP and more than US$500 billion ininfrastructure project commitments over thenext few years, Saudi Arabia offers tremen-dous business opportunities. Saudi house-holds spend the bulk of their income onnon-durable goods. Consumer demand forsuch goods is fuelled by already abundantand ever-rising cash reserves. TheKingdom’s24-million inhabitants and US$13,000-plusper capita GDP at end-2006 makes it one ofthe main markets in the Middle East. How-ever, the ‘Saudiisation’ of jobs (the officialtarget is an increase of 5 per cent each year)remains a problem as local manpower isinadequately trained to meet the variousneeds of business and the economy. Youthunemployment is rising (28 per cent among20–24 year olds) as 200,000 young Saudisarrive on the job market each year. Spendingon education and vocational training is,therefore, a budgetary priority, accountingfor 25.5 per cent of overall governmentspending.

■ Means of entryAlthough member states of the GCC estab-lished a customs union on 1 January 2003,Saudi Arabia continues to levy differentialduties on several products. Applied customs

duties are 0 per cent (basic foodstuffs), 5 percent (80 per cent of imported goods), 12 percent or 20 per cent (some locally producedgoods), 25 per cent (various fruits and vege-tables) and 100 per cent (milk, wheat, ciga-rettes and dates). Import bans apply onmostly religious grounds. WTO accession inDecember 2005 has led to a gradual reductionin differential duties and a review of somenon-tariff barriers to trade, such as theprinciple of national preference in publictenders. Despite the announcement of meas-ures to relax visa formalities, entry andresidence requirements for foreignersremainrestrictive (compulsory Saudi sponsor). Thelegal environment remains hazy, but intel-lectual property protection is improving. Ingeneral, government agencies are slow to pay(7–30 months), but defaults are rare.

■ Attitude towards foreign investorsA new investment code was adopted in April2000. Its key features include issueof licenceswithin 30 days; establishment of a one-stopshop for processing applications Saudi Ara-bian General Investment Authority(SAGIA);freehold ownership of staff facilities andaccommodation; self-sponsorship of foreigncompanies and access to concessional Saudifinancing. However, because of the monopolybarring foreigners from directly holdingshares in the country, foreign companies canoperate only through Saudi law subsidiaries


384

incorporated as private limited liability com-panies or branches. A negative list of sectorsfrom which foreign investors are barred wasdrawn up in February 2001, but cut in 2003,2005 and 2007 and accompanied by thelifting of restrictions on investment in theretail sector. The marginal rate of corpora-tion tax for foreign companies has beenlowered to 20 per cent. Losses can now be

carried forward over a limited number ofyears. A reciprocal investment protectionand promotion agreement with France wasconcluded in June 2002 and came into forcein March 2004. There is also a doubletaxation agreement between the two coun-tries renewable every five years, the nexttime in 2008.


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WORLDSaudi Arabia

SAUDI ARABIA

385

4

OPPORTUNITY SCOPE



Mn USDMn USD


Japan SouthKorea

USA China Singapore GermanyUSA China UKJapan

EXPORTS by products■ Crude oil 75%■ Refined petroleum 15% ■ Petrochemicals 5%■ Other 5%

■ 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%

IMPORTS by products

0

5000

10000

15000

20000

25000

30000

35000

0

2000

4000

6000

8000

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Indicators Saudi Arabia Regional averageEmerging

country average



386

SyriaPopulation (million inhabitants): 19.5GDP (US$ million): 34,902


STRENGTHS• Implementation of measures intended to

foster private investment has begun withprojects offering opportunities toinvestors in many sectors.

• The country has benefited from the goodregional economic conditions and thepetrodollars that have spurredinvestment.

• The free-trade agreement signed in 2005with the countries participating in theGulf Cooperation Council has enhancedregional trade and investment.

• Tourism has real development potential.• Debt ratios have become manageable

since the settlement of arrears and thecancellation of debt granted by Russia.

WEAKNESSES• The rapid decline of oil production

constitutes a threat to the economic andfinancial situation making it essential tospeed up reforms.

• Subsidy costs and unprofitable state-owned companies have strained publicsector finances.

• Although on the path of reform, abanking system still dominated byinefficient state-owned banks remainsvulnerable with the liberalisation underway since 2004 not accompanied by astrengthening of prudential andoversight regulations.

• Deficient statistical data hampers riskassessment.

RISK ASSESSMENTDespite the recession in the oil sector (down7 per cent) the economy performed well in2007, with near 4 per cent growth. The non-oil sector was the main economic enginealbeit with growth – up 5.8 per cent – slowercompared to the 6.5 per cent growth achievedin 2006, driven by a domestic demand re-bound spurred by the influx of Iraqi refugees.The drivers in 2007 were household con-sumption and private investment, domesticand foreign – particularly from the Gulfcountries, trending up in industry, tourismand transport. Drought affected agriculturehowever. The outlook for 2008 remainsbrightunderpinned by projects under way and astill-buoyant regional economic environ-ment. The necessary reductions in publicspending could, however, affect non-oil sector

growth. A further decline in oil production(down 5 per cent) will keep economic growthunder 4 per cent.

Despite efforts made to improve the busi-ness climate, it continues to suffer frombureaucratic red tape, governance weak-nesses and a lack of corporate transparency.The adoption of a new exchange rate systemwith the Syrian pegged to a currency basketinstead of the dollar should help limit im-ported inflation. High oil prices and a goodtrend on non-oil exports should hold thecurrent account deficit to 4.5 per cent of GDPin 2008. But the country still depends onstable foreign direct investment inflows tocover financing needs.

The fiscal situation has remained nettle-some due to the decline of oil revenues. Highoil prices have moreover resulted in unsus-

SYRIA

387

4

tainable subsidies estimated at 13.2 per centof GDP in 2007. Consolidation of public sectorfinances will be essential to avoid a rapidincrease in government debt. Regional geo-

political uncertainties and Syria’s politicalisolation will, however, hardly be conduciveto a speed up of reforms that could increasesocial tensions.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.0 3.1 3.3 4.4 3.9 3.7Inflation (%) 5.8 4.4 7.2 10 7.0 7.0Public sector balance (%GDP) -2.6 -4.2 -4.4 -5.7 -5.0 -5.9Exports 7.1 7.1 9.0 10.2 11.2 11.7Imports 6.4 8.1 10.4 12.1 13.0 13.4Trade balance 0.8 -1.0 -1.4 -1.8 -1.8 -1.6Current account balance 0.2 -0.8 -1.2 -2.1 -1.8 -1.7Current account balance (%GDP) 0.8 -3.3 -4.1 -6.1 -4.8 -4.5Foreign debt (%GDP) 94.2 86.4 34.8 28.0 27.8 27.6Debt service (%Exports) 17.9 16.4 6.4 4.1 4.9 5.4Foreign exchange reserves(in months of imports)

6.0 5.2 5.2 5.0 4.5 4.2



■ Means of entrySyria is committed to a policy of opennessinvolving customs reform and gradual tradeliberalisation. As a member of Greater ArabFree Trade Area (GAFTA), it has enjoyed fulland free access to the Arab market since 1January 2005, as well as free-trade agree-ments with Lebanon (1994) and Turkey (ineffect since January 2007). An associationagreement with the European Union, ini-tialled on 19 October 2004, remains dead-locked due to political reasons, primarilyoverthe situation in Lebanon. This agreementprovides for the phasing out of customsdutiesover a 12-year period and the lifting of importbans. There are 10 rates of customs duty,ranging from 1 per cent for agricultural andindustrial commodities to 50 per cent forupmarket goods, excluding cars which aretaxed 60 per cent.

The means of payment normally used isthe confirmed letter of credit. Most privateSyrian importers have funds with foreignbanks. Since the opening of the bankingmarket to private banks in 2004 and theeasing of exchange controls,Syrianimportersare encouraged to route their transactions

via local banks. Under the Patriot Act 2001,the United States has imposed an embargoagainst the Syrian Commercial Bank. Theprovisions of this act hamper transactions inUS dollars, but euro-denominated transac-tions are carried out normally. In actual fact,exports to Syria are hardly affected.

■ Attitude towards foreign investorsLaw No. 10, which aims to encourage invest-ment regardless of origin or nationality offunds, was replaced in January 2007 byDecree No. 8, which henceforth constitutesthe legislative framework for investment.The main amendments provide for broadersector allowances (the private sector can nowinvest in new areas such as telecommunica-tions and electricity), free transfer of profitsand the establishment of a one-stop shop.Investment incentives no longer include taxexemption (under the previous law profitswere tax-exempt for up to seven years), butother tax breaks on profits according to thetype of company incorporated, its locationand number of employees, all of which helpto substantially reduce the rate of corpora-tion tax. The maximum rate of taxation,which has already been lowered from 35 to28 per cent, can be cut to 14 per cent where


388

the enterprise is a private limited companyoffering 50 per cent of its shares to the public.This decree forms part of revamped taxlegislation designed to establish a wider taxbase with a reasonable and differentiatedrate (cf Decree 51 of 17 October 2006).

An ad hoc tourism investment law offersnumerous tax incentives and authorisesproperty ownership. There are also sevenfree zones in Syria – including one run jointlywith Jordan – offering highly attractive taxexemptions. The main restrictions relate totrade with Israel or Israeli-held companiesunder Arab boycott legislation. Ad hoc lawsfor industrial areas and estates offer incen-tives for setting up industrial facilities.

■ Foreign exchange regulationsAs part of the reforms of the financial sector,the Syrian government has decided to peg

the Syrian pound (SYP) to Special DrawingRights (SDRs) – and no longer to the USdollar – at a single fixed exchange rate.Currently, the SYP is holding up against thedollar, even reaching record levels below the50 pound mark (48.7 at 10 October 2007,compared with the usual rate of 50–52pounds). The Syrian pound, however, re-mains a non-convertible currency. Since theopening of private banks, foreign currencyaccounts are authorised, but there is a ceilingon transfers. Only foreign currency broughtinto the country may be transferred abroad.Since 2007, currency regulations have beenliberalised, with nine bureaux de changeallowed to open, only two of which are so faroperational. Importers can easily buy foreignexchange through local banks. Unlawfulmoneychangers have all but disappeared.

SYRIA

389

4

OPPORTUNITY SCOPE


Private consumption 50Public conusmption 10Investment 14

Mn USDMn USD


Iraq LebanonGermany Italy Egypt ChinaSaudiArabia

Egypt ItalyUAE

EXPORTS by products■ Fuels 68%■ Foodstuffs and agricultural raw materials 18%■ Textiles, clothing 5%■ Other 9%

■ Fuels 27%■ Machinery and transport equipment 24%■ Foodstuffs and agricultural raw materials 21%■ Chemicals 14%■ Iron and steel 8%■ Plastics 6%■ Other 1%

IMPORTS by products

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Indicators Syria Regional averageEmergingcountry average



390

TunisiaPopulation (million inhabitants): 10.1GDP (US$ million): 30,298


STRENGTHS• The country enjoys substantial assets

including proximity to the Europeanmarket, vast tourist potential andpolitical stability.

• With its economic diversification andliberalisation policy, Tunisia has won theinternational community’s political andfinancial support and facilitated itsaccess to international capital markets.

• The partnership agreement with theEuropean Union has spurred progressiveupgrading of industry, infrastructure andthe financial sector.

• Access to education and a developedsocial security system have fostered areduction in inequalities and theemergence of a dynamic middle class.

WEAKNESSES• Endowed with limited natural resources,

Tunisia’s economic growth has beendependent on exogenous factors likeEuropean demand and weatherconditions.

• Tourism remains vulnerable to theterrorist threat.

• An increasingly open economy and theend of the Multifibre Arrangement in2005 impose continuing efforts todiversify and improve thecompetitiveness of industrial production.

• The financial sector continues to sufferfrom a high rate of non-performing loans(19 per cent end 2007).

• High unemployment – 14 per cent of theworking population – mainly affectsyouth with 30 per cent of those between15 and 25 unemployed.

RISK ASSESSMENTGrowth remained strong in 2007, driven bybuoyant household consumption and firminvestment mainly in three sectors: buildingand public works, tourism and services (bankand financial back offices, offshoring). Theeconomy should continue to benefit this yearfrom gradual diversification of the productivefabric, particularly the rise of the mechanicalengineering and electricity sectors, whichhas been gradually offsetting the textilesector’s loss of competitiveness. The brightoutlook, underpinned by the government’sproactive industrial policy and a highlyeffective business climate, is reflected in thesatisfactory level of corporate solvency. The

Coface payment incident index for Tunisiahas thus been trending down for the pastthree years.

The good economic conditions have facili-tated public finance management. The fiscaldeficit should thus remain below 3 per centof GDP in 2008, higher subsidies of petrolprices notwithstanding. The trade balance,meanwhile, has suffered from the surge ofhydrocarbon prices and from the competitionin critical export sectors, moreover expectedto intensify with the Tunisian market com-pletely open to European products fromJanuary 2008. The current account deficithas nonetheless remained limited, thanks tothe level of tourism revenues and net incom-

TUNISIA

391

4

ing private transfers. In this context FDI haslargely covered moderate financing needsand the country’s foreign exchange reserveshave been very ample. Although still high,the level of debt has thuscontinuedtodecline.

The country enjoys great political stability.However, massive unemployment of young

graduates has stirred deep and widespreadfeelings of frustration. Despite the govern-ment’s commitment to stimulate the econ-omy, underemployment of trained youthshould remain a major problem.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.6 6.0 4.0 5.4 6.0 6.2Inflation (%) 2.7 3.6 2.0 4.5 3.0 3.0Public sector balance (%GDP) -3.4 -2.6 -3.0 -2.8 -2.7 -2.6Exports 8.0 9.7 10.5 11.5 13.5 14.5Imports 10.3 12.1 12.5 14.0 16.3 17.7Trade balance -2.3 -2.4 -2.0 -2.5 -2.8 -3.2Current account balance (%GDP) -2.9 -1.9 1.1 -2.3 -2.5 -2.8Foreign debt (%GDP) 83.7 81.2 75.0 70.0 67.0 63.0Debt service (%G&S exports) 11.0 14.5 13.8 17.3 12.5 11.3Foreign exchange reserves (in months ofimports).

2.7 3.0 3.2 4.5 4.7 4.7



■ Means of entryUnder the association agreement signedbetween Tunisia and the EU in 1995, nocustoms duty is to be levied on EU manufac-tured goods entering Tunisia with effect from1 January 2008, except for agri-foodstuffswhich are subject to only partial exemption.However, some non-tariff barriers will re-main in place for sensitive products in theform of monopolies, import quotas and adhoc taxes on imported goods like luxuryarticles and cars. Since 1996, Tunisia andthe EU have granted each other preferentialtariff quotas for a list of farm and fisheryproducts, pending wider trade liberalisation.

In matters of trade legislation freedom ofcommerce is the rule since 1994. Almost allimports of goods require nothing more thana simple invoice. However, despite someimprovements such as the introduction ofelectronic procedures, customs clearance isstill too lengthy compared to internationalstandards, and delays continue to dog theroll-out of logistics and infrastructure. Prod-ucts such as foodstuffs and consumer goods,

even where they comply with Europeanstandards, are not immune from, often com-prehensive, health, phytosanitary or techni-cal inspections of variable duration.

Fund transfers for the settlement of ordi-nary transactions (import, export, provisionof services, dividends, etc) are unrestrictedand are handled by approved financial insti-tutions (banks) without prior Central Bankapproval. Under a bilateral tax treaty, serv-ices provided by a French company for aTunisian client are liable to 15 per centwithholding tax in Tunisia. Exporters canchoose from a wide range of payment instru-ments (SWIFT, documentary credit, bankguarantees, etc) but should take into accountthe level of trust established with theirpartners and the risk of default which,though the situation is much improved,persists. In their contractual relations,French exporters may opt for cases to betried under French law and by French courtsin order to bypass the cumbersome processesof Tunisian law (franchises, exclusivity) andavoid the risk of legal uncertainty.


392

■ Attitude towards foreign investorsUnder the Investment Incentive Act, foreign-ers and Tunisian nationals are free since1993 to invest in all sectors, except the retailand wholesale trade, state monopolies (wa-ter, electricity, gas, post office, etc), mining,hydrocarbon and financial services (bankingand insurance), all of which are governed byad hoc regulations. For sectors covered bythe law, investors benefit from administra-tive facilities such as a one-stop shop forcompany incorporation. In some sectors,though, the freedom to invest is conditionalupon obtaining prior approval. For non-export-orientated service activities tight re-strictions in fact are in place, including a 49

per cent ceiling on foreign shareholdings. Itis also difficult for foreigners to acquireestablished Tunisian firms.

Offshore investments – ie where over 70per cent of production is exported – enjoy astring of benefits (free warehouse, tax breaksand exemptions, quota of four foreign em-ployees). However, offshore businesses setup after 1 January 2008 will be subject to 10per cent corporation tax, except those locatedin regional development areas. Foreignersare barred from owning farmland but canacquire long leaseholds. While the countryhas an open attitude to foreign investment,companies should be cautious about legaland administrative uncertainty and choosinga local partner.


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WORLDTunisia

TUNISIA

393

4

OPPORTUNITY SCOPE



Mn USDMn USD


France GermanyItaly Spain Libya ItalyFrance Germany LibyaSpain

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%

■ Oil and oil by-products 15%■ Textiles 15%■ Electrical equipment 14%■ Machinery 12%■ Vehicles 6%■ Chemicals 11%■ Other manufactured goods (textiles excluded 18%■ Other 9%

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Indicators Tunisia Regional averageEmergingcountry average



394

United Arab EmiratesPopulation (million inhabitants): 4.6GDP (US$ million): 163,000


STRENGTHS• The economy is diversified and Dubai has

been actively developing the non-oilsector (aluminium, financial services,tourism).

• Abu Dhabi is endowed with substantialoil and gas reserves and like Dubai hasbeen diversifying its productive fabric.

• The Emirates enjoy a solid financialsituation. Foreign debt has been rapidlygrowing but with extensive financialholdings abroad, the country is benefitingfrom an external net creditor position.

• The banking system is efficient.

WEAKNESSES• The opacity of public sector and private

company financial data hampers riskanalysis.

• Although diversified, the economy is stilldependent on Abu Dhabi’s oil revenues.

• Regional geopolitical instabilityconstitutes a risk for an economyevolving into an international businesscentre.

RISK ASSESSMENTDriven by oil revenues, investment and rapidpopulation growth, the economy has grownstrongly. The non-oil sector grew nearly 10per cent in 2007 with the relative slowdownin the overall economy resulting from thereduction of hydrocarbon production. Theeconomic dynamism extends to most seg-ments of the economy, from manufacturingand construction to services (commerce,transport and finance). The economy shouldremain buoyant in 2008, underpinned byhigh barrel prices, with an oil productionrecovery expected to contribute to an esti-mated 8.5 per cent growth acceleration.Outside oil, economic bottlenecks, a creditslowdown and rising costs could delay somelarge construction projects and affect growth.In this context, inflationary pressures,mainly attributable to the housing shortageand the rising cost of rent, particularly inDubai, will be unlikely to ease.

Implementation of a vast public invest-ment programme (2006–2011) intended todevelop infrastructure – ports, airports,roads and housing – and production capacityin oil, petrochemicals and metallurgy hasbolstered the economic outlook. This pro-gramme along with a dynamic upscale busi-ness environment should continue to spurpopulation growth. The extent of propertydevelopment in Dubai could ultimately trig-ger a price correction affecting weaker com-panies in that sector as well as the mostexposed banks. A sudden market collapsedoes not, however, appear to be the likelyscenario.

The business environment remains buoy-ant. Despite the regional geopolitical uncer-tainties, the economic liberalism – incustoms-free area and the property sector –and domestic political stability have beenreassuring to investors and have attractedcapital.

UNITED ARAB EMIRATES

395

4


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 11.9 9.7 8.2 9.4 7.7 8.5Inflation (%) 3.1 5.0 6.2 9.3 9.8 10.0Public sector balance (%GDP) 13.0 18.4 26.8 28.8 27.6 27.8Exports 67.2 90.2 117.2 142.6 152.0 168.5Imports 45.8 63.4 74.5 86.1 92.4 103.3Trade balance 21.4 26.8 42.7 56.5 59.6 65.2Current account balance 7.6 10.3 24.3 36.1 38.7 42.9Current account balance (%GDP) 8.6 9.9 18.3 22.1 20.9 20.6Foreign debt (%GDP) 18.9 26.8 31.2 47.3 55.3 58.6Debt service (%GS& T exports) 4.7 3.5 3.9 5.2 9.0 10.7Foreign exchange reserves (in months ofimports)

2.8 2.6 2.4 2.7 2.9 3.2



■ Market overviewIn spite of a number of restrictive practices(local majority partner, closure of some sec-tors to foreigners, local agent, local sponsor-ship for a residence permit), the United ArabEmirates’ market is very open and highlycompetitive. The UAE is a member of theWTO and, through the Gulf Co-operationCouncil (GCC), is a party in talks on a free-trade agreement with the EU.

■ Means of entryUAE customs duties applied since 1 January2003, the date of introduction of the GCCcustoms union, are 0 per cent for basic staplesand 5 per cent of the CIF value for othergoods. The country’s standards policy isbased on that of the GCC. A national stan-dards agency Emirates Authority for Stan-dardisation and Metrology (ESMA) was setup in 2003 to establish nationwide standardsand, above all, to play an active role in theharmonisation of regulations within theGCC.

All modern means of paymentareavailablein the UAE. The cheque, documentary creditcollection, promissory note and bill ofexchange are not recommended.

■ Attitude towards foreign investorsThe UAE and the Emirate of Abu Dhabi inparticular have actively sought FDI both to

develop the hydrocarbon sector and, morerecently, to improve management of some ofits public services, particularly those con-nected with the production and supply ofelectricity and water. Faced with the gradualdepletion of its oil reserves, the Emirate ofDubai is striving to channel foreign invest-ment into economic diversification, particu-larly in the property, tourism and servicesectors and lately in high-tech cluster indus-tries. The Emirate of Abu Dhabi is furtherdiversifying into heavy industry (steel, alu-minium, petrochemicals). There is no directtaxation of either individuals or companies(except banks, oil companies and telecomsoperators). Capital may be freely repatriated.Moreover, new laws have been passed toopen up land ownership to foreigners. Nev-ertheless, a number of obstacles to FDIremain. Just as foreign companies operatingoutside the free zones are required to have alocal majority partner in a joint venture, sonon-nationals residing in the UAE must havea local sponsor. Company law reform legis-lation, under which foreigners will be per-mitted to hold a majority stake in localcompanies, is in the pipeline.

■ Foreign exchange regulationsThere are no exchange controls in the UAE.The UAE dirham has a fixed rate of exchangewith the US dollar at AED3.6725 to thedollar. There are no restrictions on capitaltransfers.


396

OPPORTUNITY SCOPE



Mn USDMn USD


Japan ThailandSouthKorea

India Iran ChinaUSA India JapanGermany

EXPORTS by products■ Hydrocarbons 50%■ Re-exports 32%■ Other 18%

■ Machinery and vehicles 38%■ Pearls and precious stones 21%■ Manufactured goods 15%■ Ores and metals 11%■ Foodstuffs 7%■ Other 8%

IMPORTS by products

0

5000

10000

15000

20000

25000

30000

0

3000

6000

9000

12000

15000



Indicators United Arab Emirates Regional averageEmerging

country average

GNP per capita (PPP dollars) 23,990 7,746 5,983GNP per capita (USD) 23,950 4,167 2,313Human Development Index 0.839 0.716 0.672Wealthiest 10% share of national income n/a 27 31Urban population percentage 77 59 44Percentage under 15 years old 22 32 30Number of computers per 1,000inhabitants 197 92 50

YEMEN

397

4

YemenPopulation (million inhabitants): 21.6GDP (US$ million): 19,057

Country @rating: CMedium-term rating: Very high riskBusiness climate rating: D

STRENGTHS• The country enjoys the political and

financial backing of the internationalcommunity with a promise made inNovember 2006 for US$5 billion in aid tofinance development and povertyreduction projects.

• The production start-up in 2009 of anatural gas liquefaction facility willbreathe new life into the economy.

• Foreign debt has been a mild constraint,thanks to relief granted by the ParisClub.

• Transfers from expatriate workers haveconsolidated the invisibles balance.

WEAKNESSES• The economy continues to depend on oil

revenues that have been in decline due todepletion of reserves.

• Political instability and poverty haveimpeded the structural adjustmentsneeded to prepare the transition to apost-oil economy.

• Insecurity, corruption and a shortage ofprofessional skills have affected thebusiness climate.

• Qat consumption has underminedeconomic activity.

RISK ASSESSMENTA further 10-per cent decline in oil productionmarked 2007, undercutting economic growthestimated at 3.6 per cent. Growing at asomewhat stronger 5.0 per cent clip, the non-oil sector was the main economic driverunderpinned by household consumptionspurred in turn by emigrant worker remit-tances and public spending. The outlook for2008 is bright in view of an expected invest-ments upturn and progressive implementa-tion of projects financed by international aid,with half contributed by Gulf monarchies.Household consumption will continue totrend up, buoyed by new civil service wageincreases, for military personnel in particu-lar, with some increases effective late 2007.Oil production should decline less than it hasthese past two years with growth accelerat-ing to an estimated 4.3 per cent in conse-

quence. After an upsurge in prices in 2006,attributable to rapid domestic demandgrowth and rising world prices for commodi-ties, better harvests contributed to slowingthe price rise in 2007. Inflationshouldremainhigh, however, stoking social tensions in acountry among the poorest in the region. Itwill thus be difficult to implement an over-haul of public finances undermined by grad-ual decline of oil revenues and largersubsidies prompted by soaring barrel prices.The VAT system introduced in 2007 shoulddiversify sources of fiscal revenues, but as aresult of opposition in business circles itincludes exemptions that will limit its scope.Accompanied by increased hydrocarbon im-ports, the decline in oil production alsocaused external accounts to deteriorate in2007. More constrained domestic consump-tion should facilitate reducing the currentaccount deficit in 2008.


398


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.7 4.0 4.6 4.0 3.6 4.3Inflation (%) 11.9 12.0 14.5 20.3 14.0 11.5Public sector balance (%GDP)* -5.1 -2.9 -2.2 0.8 -4.1 -4.6Exports 3.9 4.7 6.4 7.3 6.9 7.6Imports 3.6 3.9 4.7 5.9 7.5 7.5Trade balance 0.4 0.8 1.7 1.4 -0.6 0.1Current account balance 0.2 0.2 0.6 0.6 -0.7 0.0Current account balance (%GDP)* 1.5 1.6 3.8 3.2 -3.1 -0.1Foreign debt (%GDP) 45.6 39.6 31.8 27.3 25.8 25.2Debt service (%Exports) 2.3 3.7 3.9 3.4 4.3 3.7Foreign exchange reserves (in months of imports) 10.4 10.3 8.9 10.2 10.7 12.2



■ Market overviewSeveral types of levy apply to imported goods,including ‘duties and taxes’ on all authorisedimports. Customs duty is levied at the singlerate of 5 per cent of the cost, insurance andfreight (CIF) value. There is also 3 per centadditional tax, a freight tax calculated on thevolume and length of storage and, since July2005, 5 per cent general sales tax (except forflour, rice, drugs, baby milk and raw gold).Exporters are advised to use either irrevoca-ble letters of credit confirmed by a first rate(preferably foreign) bank or advance pay-ments. Some Yemeni traders have financialassets abroad that they can use to pay forimports into the country. A letter of creditopened with CALYON, the only Westernfinancial institution with branches inYemen,does not need to be confirmed, particularly ifthe seller is prepared to cover the risk of non-transfer. Some foreign inspection companiesare represented in Yemen, with BureauVeritas due to open a branch in the countryat the end of 2007.

■ Attitude towards foreign investorsForeign investment is governed by law No.22 of 1991, amended several times, mostrecently in 2002. There are also ad hoc lawsoffering special terms for oil exploration/production and public works. In general,investors are granted tax breaks and exemp-tions from customs duty. Investment capitaland profits can be freely repatriated at themarket rate. The law lays down the principleof equality between Yemenis and foreigners.Foreigners may hold a majority, even 100per cent, stake in a local company but wouldbe well advised to team up with a localpartner. The Labour Code (in Arabic) coverskey issues, but its interpretation may giverise to confusion. As social protection is poor,some companies take out private insurancecover for their employees.

■ Foreign exchange regulationsThe Yemeni rial is stable versus the dollar.The exchange dipped from 198 rials to thedollar in October 2006 to 199 rials in October2007.

YEMEN

399

4

OPPORTUNITY SCOPE



Mn USDMn USD

MAIN DESTINATIONS OF EXPORTS MAIN ORIGIN OF IMPORTS

China ThailandIndia SouthKorea

USA ChinaUAE SaudiArabia

KuwaitSwitzerland

EXPORTS by products■ Fuels 78%■ Foodstuffs 3%■ Machines and transport equipment 2%■ Other 17%

■ Machinery and transport equipment 23%■ Fuels 21%■ Manufactured goods 21%■ Foodstuffs 20%■ Chemicals 6%■ Other 9%

IMPORTS by products

0

500

1000

1500

2000

2500

0

200

400

600

800

1000

1200



Indicators Yemen Regional averageEmergingcountry average

GNP per capita (PPP dollars) 920 7,746 5,983GNP per capita (USD) 760 4,167 2,313Human Development Index 0.492 0.716 0.672Wealthiest 10% share of national income 26 27 31Urban population percentage 27 59 44Percentage under 15 years old 46 32 30Number of computers per 1,000 inhabitants 15 92 50

5

Sub-SaharanAfrica

Outlook for 2008:Sub-Saharan Africa 402

Angola 410Benin 414Botswana 416Burkina Faso 420Burundi 422Cameroon 424Cape Verde 427Central African Republic 428Chad 430Congo 432Democratic Republic of Congo 434Djibouti 435Eritrea 437Ethiopia 439Gabon 441Ghana 445Guinea 449Ivory Coast 451Kenya 455

Liberia 459Madagascar 462Malawi 464Mali 465Mauritania 467Mauritius 470Mozambique 474Namibia 478Niger 480Nigeria 481Rwanda 485Sao Tome and Principe 487Senegal 488Sierra Leone 492South Africa 494Sudan 498Tanzania 500Togo 503Uganda 505Zambia 509Zimbabwe 512

OUTLOOK FOR 2008

402

OUTLOOK FOR 2008

Sub-Saharan AfricaMarie-France Raynaud

Economic Research and Country Risk Department, Coface

■ Growth spurred by raw material pricesSub-Saharan Africa has achieved stronggrowth above 5 per cent for the past fiveyears, buoyed by soaring raw material pricesamid dynamic Chinese and Indian demand.Economic growth reached 6.1 per cent in2007 and should climb to 6.8 per cent in2008.

Oil countries in a position to increasetheir production capacity have capital-ised on the upsurge in hydrocarbonprices. Oil prices could reach US$80 perbarrel of North Sea Brent in 2008 – havingincreased over 350 per cent between 2003and 2007 – due to strong Asian demand,limited refining capacity, speculationprompted by the finite character of hydrocar-bon resources and persistent political uncer-tainties, notably in the Middle East. Angolashould thus achieve 26 per cent GDP growththis year, thanks to the development of off-shore fields, Equatorial Guinea shouldcontinue enjoy growth exceeding 10 per centand Gabon, whose economy grew at a steadypace below 3 per cent until 2006, should postgrowth exceeding 5 per cent in 2008 as it didin 2007, buoyed by the production start-up ofnew fields. Africa’s leading oil producer,Nigeria, should experience a growth re-bound this year, thanks to the start ofexploitation of offshore fields vulnerable toattacks by insurgents from the Niger Deltaregion like those that affected output in 2007.

Ore and metal-exporting countriesshould also continue to enjoy strong growth

with prices for iron, copper (Zambia), ura-nium (Niger) and platinum (South Africa)remaining buoyant, thanks to demand fromAsia. Farm-product exportingcountries,like Ghana (cocoa) or Benin, Mali andBurkina Faso (cotton) should similarlycontinue to benefit from upward price trendseven if those products are subject to highvolatility.

Growth has been driven by buoyant rawmaterial prices (%)

01

234

56

78

2001 2002 2003 2004 2005 2006 2007 2008

Africa Emerging countries

Domestic demand should also generallyremain buoyant. Subject to good weathercon-ditions, household consumption shouldremain dynamic, underpinned by risingfarm incomes. Public sector investmentshould moreover continue to grow.Thanks to debt-service relief granted and re-forms undertaken under the HIPCandMDRIprogrammes, governments have had theroom for manoeuvre to undertake vast in-vestment programmes not only in transportand energy infrastructure but also in health

OUTLOOK FOR 2008

403

5

and education. This context has alsoprovideda framework conducive to developmentof private investment,especiallyforeigndirect investment (FDI). Although mainlyfocusing on activities related to hydrocarbonand ore extraction where upwardpricetrendsbuoy profitability, FDI has also been flowingincreasingly into the construction and tele-communications sectors. FDI inflows thus in-creased twofold between 2004 and 2006. Thistrend should continue in 2008, albeit at amore moderate pace.

Despite rising petrol and foodstuffprices, average inflation on the conti-nent should remain limited to under 7per cent in 2008 although the situationswill vary widely. Inflation in countries be-longing to the franc zone should remainbelow 3 per cent with the pegging of the CFAfranc to the euro and the Europeancurrency’sappreciation against the dollar resulting in asubstantial reduction in imported inflation.Inflation should, however, exceed 10 per centin Ethiopia and Guinea and even 25 per centin Eritrea, stirring keenly feltpopulardiscon-tent as a consequence.

South Africa, representing 40 per centof sub-Saharan African GDP, and since2003 enjoying strong growth driven by buoy-ant domestic demand, has shown signs ofoverheating. In 2007, the productioncapacityutilisation rate exceeded 80 per cent, house-hold debt represented over 80 per cent ofdisposable income and inflation was abovethe 6 per cent threshold. The central bank’srestrictive policy, highlighted by a significantincrease in its key rate and adoption in June2007 of the National Credit Act tighteningthe conditions of access to credit, is expresslyintended to achieve a soft landing for house-hold consumption, expected to ease to 4.5 percent in 2008 and investment should take overas the new growth engine.

Despite generally good conditions,thecontinent’s growthshouldremainbelowthe 7-per-cent rate needed to achievethe UN Millennium Development Goals,which notably include a 50 per cent reductionin poverty by 2015. Efforts to foster economicdynamism have notably come up against apoor energy and transport infrastructurenetwork and insufficient human capital de-

velopment. A lack of diversification of theproductive fabric and exports and the pre-dominance of agriculture in the GDP makesthe African economy vulnerable to exogenousshocks, be they inclement weather or thevolatility of world prices. A scenario ofdeclining raw material prices in 2008,although highly unlikely, cannot be ig-nored in view of the appreciable risks of agreater-than-expected decline of Americanand European demand after a widening ofthe credit crisis or a more severe growthslowdown in China with the overcapacitygenerated by the investment boom under-mining the financial viability of certaincompanies.

■ Public sectors accounts generallyshowing imbalances despite moreprudent fiscal policies

Oil countries, except Chad, have beenrunning fiscal surpluses, thanks to thegrowth of oil revenues. In addition, a veri-table strategy for managing oil exportrevenues sometimes accompanies thisgood fiscal performance, with certain oilcountries seeking to leverage past experiencewith raw material cycles by not basing theirlong-term spending programmes solely onthose erratic revenue flows. Nigeria hasthus set up an Oil Fund with resourcesallocated to long-term savings and intro-duced a fiscal rule based on a very conserva-tive oil-price hypothesis.

Non-oil countries, except South Af-rica, where the tight fiscal policy pursuedhas resulted in public sectors essentially inbalance, have experienced difficulties inaligning still insufficient revenueswithgrow-ing needs – primarily concerning infrastruc-ture, combating poverty, public health(especially the effects ofAIDS)andeducation.Reforms relating to fiscal policy under-taken under the HIPC and MDRI pro-grammes have facilitated the start of abuild-up of fiscal revenues, thanks notably toimproved tax collection and revision of bene-fits granted to certain foreign investors.Thanks to debt-service relief, countriesthat have benefited from the HIPC andMDRI programmes have been able tofree up additional fiscal room for ma-

OUTLOOK FOR 2008

404

noeuvre in funding priority spending, nota-bly on health and education.

The additional leeway has nonethelessproven limited in view of the concessionalnature of previously contracted debt. Al-though the amount of debt-service was cut inhalf in relation to exports on average between1999 and 2005, down from 15.2 per cent to7.4 per cent, the improvement proves lesssignificant in relation to total fiscal spending.

Despite the undeniable progress, the fiscalpositions of certain countries could weakenin 2008. The expiration of the CotonouAgreement and the introduction of tradereciprocity in the Economic PartnershipAgreement could have a depressive effecton customs revenues, which represent 15 percent of total revenues of countries in theEconomic Community of West African States(ECOWAS).

More generally, the rise of subsidiesintended to maintain purchasing poweracross Africa amid soaringfoodstuffandoil prices could strain public spendingeven more. In such conditions, internationalaid will continue to cover financing needs.

■ External accounts generally in deficit –except for oil countries

The external positions of African coun-tries vary widely according to changesin the terms of trade. Countries rich in nat-ural resources enjoy trade surpluses and veryample foreign exchange reserves whereasthe great majority of sub-Saharan Afri-can countries are net importers of hy-drocarbon and foodstuffs (corn, wheat,rice, vegetable oil) and suffer from deteri-orating trade balances. Food productprices seem to be trending durably up due togrowing demand from emerging countries.The change in food habits of consumers inthose countries in favour of meat productshas resulted in particular in a sharp increasein demand for grain. The increasing use ofproducts like cornandvegetableoil forbiofuelproduction also contributes to the increasingcost of food products. Meanwhile, the vastinvestment programmes implementedin many African countries have contrib-uted to the increased capital goods im-ports, a trend likely to intensify in 2008.

The region's current account will remain indeficit (% of GDP)

-6%

-4%

-2%

0%

2%

4%

6%

2001 2002 2003 2004 2005 2006 2007 2008

Emerging countriesAfrica

In South Africa, the current accountdeficit should remain large with capital goodsimports undermining the trade balancewhereas durable and semi-durable goodsimports should be flat amid the slowdown ofhousehold consumption. South Africa thusremains exposed to exchange rate risk,especially with external financing needs stillmainly covered by volatile capital and withlittle prospect of a significant increase indirect investment inflows in the near term.The financing needs of other oil-import-ing countries, except Botswana, will alsoremain large.

Since those countries generally do not ben-efit from sufficient FDI inflows, interna-tional aid will remain crucial infinancing development efforts. At theJuly 2005 Gleneagles Summit, financialbackers made commitments to double by2010 the amount of development aidprovidedto Africa in the Millennium DevelopmentGoals framework. Since then, interna-tional aid has mainly taken the form ofdebt relief, which thus representedoverhalftotal aid granted to Zambia compared to 40per cent for Ghana and nearly 30 per cent forthe Democratic Republic of Congo. Atthe Berlin Summit on 14 December 2007,the World Bank made a commitment to payout US$41.6 billion from 2008 to 2011 to con-tribute to the funding of priority spending onenergy and transport infrastructure.Thisaidwill, however, remain concentrated on alimited number of countries that benefit fromsupport from financial backers for strategicor political reasons. In 2007, Ethiopia,Moz-ambique, Nigeria, RDC, Congo Repub-lic, Sudan, Tanzania and Zambia thus

OUTLOOK FOR 2008

405

5

received half the Official DevelopmentAid granted to sub-Saharan Africancountries.

Despite the increase in FDI inflows, Af-rica’s share in total world FDI remainsmarginal (2 per cent) compared to theother emerging regions, notably SouthAsia, East Asia and Southeast Asia, whichattract 15 per cent of FDI, and Latin Americaand the Caribbean area (6 per cent). Poorinfrastructure, a political situation that isstill unstable despite significant progressand an inhospitable business environmenthave deterred FDI development. FDI alsofocuses on a limited number of countries anda very limited number of sectors – mainlyextractive industries – which offer prospectsof high profitability. Nigeria is the mainbeneficiary followed by Angola, Sudan,Equatorial Guinea, Chad, Ghana andMozambique. The Least DevelopedCountries in Africa have nonethelessbeen host to 23 per cent of FDI inflowsto Africa, particularly for exploration pro-jects for mining and oil-bearing resources. In34 sub-Saharan African countries, however,total FDI was under US$100 million. Al-though at this juncture FDI has generatedonly limited locomotive effect on the rest ofthe productive fabric, outside the buildingand public works sector, it is increasinglydirected at service sectors,particularlytrans-port and telecommunications. The fourleading countries investing in Africaare France, the Netherlands, South Af-rica and the United Kingdom. China nowrepresents 10% of FDI in Africa.

Despite the efforts of the internationalcommunity and the high profitability ofmining extraction development projects, thelevel of aid provided has not sufficed tosupport the development of sub-SaharanAfrican countries, while FDI has remainedlimited.

It is thus not surprising that a growingnumber of African countries that haveachieved marked improvement in theirdebt ratios are now turning to capitalmarkets to finance their development.Ghana thus issued Eurobonds last year withGabon and Kenya following suit. In thesecircumstances, the return to indebted-

ness positions by African countries willbear watching. Especially with new finan-cial backers, like China and India, proposinglow-interest loans, often guaranteed by nat-ural resources, and in conditions moreovernot always entirely transparent.

■ After the HIPC and MDRI programmes,resurgence of debt will bear watching

The HIPC programme reserved for highlyindebted poor countries continued in 2007with Sao Tome and Principe becoming inFebruary 2007 the 17th of the 40 eligiblecountries to reach the ‘completion point’. Thecountry thus benefited from cancellation ofits entire debt to Paris Club financial backersand, subject to continuing efforts on struc-tural reforms, should benefit from debt relieffrom the World Bank, the African Develop-ment Bank, and the IMF under the MDRIprogramme adopted in July 2005 at theGleneagles Summit.

The 17 countries that have benefitedfrom the HIPC and MDRI programmeshave thus achieved a significant reduc-tion in the level of their debt. Oil-exporting countries have, meanwhile,capitalised on the soaring hydrocarbon towipe out their debt. The agreementconcludedin October 2005 with the Paris Club – US$18billion in debt relief and US$12 billion inrepayment of residual debt – thus resultedin virtually the total elimination of Nigeria’sforeign debt. Angola normalised with ParisClub creditors in 2007 with the countrypaying off its arrears entirely and resumingregular and timely repayment of instalmentsdue on its debt.

HIPC and MDRI intiatives have contributed to the clear improvement in external debt ratios

(in % of goods and services exports)

0%50%

100%150%200%250%300%

2001 2002 2003 2004 2005 2006 2007 2008

Africa Emerging countries

The return to indebtedness of Africancountries will nonetheless bear watch-

OUTLOOK FOR 2008

406

ing. The IMF has set up a Debt Sustainabil-ity Framework (DSF) to guide borrowingdecisions by countries having benefit fromthe HIPC and MDRI programmes. The DSFstipulates – according to the quality of theinstitution environment – indebtednessthresholds beyond which repayment risk isconsidered very high. Benin, Madagascar,Mozambique and Zambia thus benefit, dueto the quality of their government’s economicand structural policies, from higher thresh-olds than Ethiopia, Malawi, Niger andRwanda. Those thresholds could, however,be reached soon with the emergence of newfinancial backers, like China or India, whichextend loans, sometimes in a relativelyopaque manner, and thereby jeopardisethe coordination efforts of the other officialcreditors. As such, an ultimate returnto over-indebtedness constitutes an ap-preciable risk.

■ A shaky improvement in the politicalenvironment with deficiencies ingovernance terms

The political and security situation inAfrica has developed along favourablelines in recent years. Although the numberof armed conflicts has declined, there arehowever still as many instability hot spots.The United States has made easing theunderlying tensions a strategic priorityin combating international terrorism asevidenced by the establishment of a newhigh-command structure for Africa, theUnited States Africa Command.

Southern Africa should remain the moststable region on the continent, with thenotable exception of Zimbabwe, increas-ingly mired in a political, economic and socialcrisis marked by galloping inflation,completedisorganisation of economicactivityandmas-sive emigration.

Botswana, Mauritius and Namibia en-joy a relative political consensus with inter-community tensions remaining limiteddespite extensive underemploymentandpov-erty. South Africa has entered a phase ofpolitical transition with the election as ANCleader of Jacob Zuma, backed by the COS-ATU 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, inMozambique, which emerged from 20 yearsof civil war in 1993, even if recent develop-ments are not entirely positive. In Angola,five years after the end of the civil war,general elections have still not taken placeand have now been postponed until 2009.Madagascar enjoys a stable situation con-solidated by the free and transparent elec-tions held in December 2006.

Conversely, East Africa seems to besinking deeper and deeper into a quagmire.In Sudan, the conflict continues in Darfur,and the efforts by the international commu-nity to protect the civilian populations havethus far not produced the desired results.Resurgence of the North/South conflict re-mains moreover a distinct possibility. Thisviolent hot spot has implications for neigh-bouring countries, particularly the CentralAfrican Republic and especially Chadwhere the government has been contendingwith a resurgence of the insurrection by rebelmovements. The conflict in Somalia oppos-ing the interim government’s forces and rebelmovements has continued unabated. It couldmoreover lead to a new ‘face-off’ betweenEthiopia, which backs the governmentforces,and Eritrea more on the side of the rebels,with these two countries as yet incapable ofresolving their own dispute over demarcationof their common border. Prospects for break-ing out of the crisis that has developed in theDemocratic Republic of Congo have beenundermined by an instability fomented bythe militias in many regions. Last but notleast, the intensification of ethnic tensions inKenya in the wake of the disputed electionsin December 2007 due to perceived unfairredistribution of wealth and land could havea tremendously negative impact on the sta-bility and the development of the GreatLakes region.

In West Africa, future developments inthe situation in Ivory Coast and Nigeriawill mark the political environment. InIvoryCoast, the formation of a national unitygovernment after the Ouagadougou Accordsof March 2007, constituted a decisive step inthe process of breaking out of the crisis.There is, however, no guarantee of stability,

OUTLOOK FOR 2008

407

5

and successful completion of the populationidentification process, notably in the North,prerequisite to the holding of general elec-tions, is crucial to the country’s reunification.In Nigeria, the new President, UmarYar’Adua, who came to power via contestedelections, has taken pains to enhance hislegitimacy by setting up a national unitygovernment and naming as vice-president, apersonality coming from the Niger Deltainsurrection region. The year 2008 will bedecisively important for the new presidentwho must strengthen his legitimacy andauthority to follow through on the reformsundertaken, notably as regards combatingcorruption.

The political stability of countries likeMali, Burkina, Senegal, Gabon and Came-roon should not be in jeopardy during the

current year even if some deterioration of thesituation has been perceptible in Senegal,with an increase in discretionary politicaldecisions, and in Mali, with the Tuaregrebellion heating up. Stabilisation policy isgoing forward meanwhile in Sierra Leone,after the success of the elections in July 2007,which resulted in a political changeoverwithout triggering a new civil conflict; inLiberia, which is engaged in a far-reachingstructural reform process; in Togo, whichrecovered international community supportafter the elections in October 2007 and inMauritania, which experienced its first freeand transparent elections in September2007.

Beyond the security question, gover-nance continues to be the African Achil-les’ heel and institutional environmentquality is crucial to economic development.

Business climate rating: sub-Saharan Africa

South

Afri

ca

Botsw

ana

Mau

ritiu

s

Namibi

a

Seneg

al

Benin

Burkin

a Fas

o

Camer

oon

Ivory

Coast

Gabon

Ghana

Kenya M

ali

Uganda

Zambia

Angola

Congo

(DRC)

Ethiop

ia

Guinea

Moz

ambiq

ue

Niger

Nigeria

Sudan

Tanza

nia

A1

D

C

B

A4

A3

A2

The efficiency of public services (govern-ment, education, health and infrastructure),regulatory quality, the rule of law and alimited degree of corruption are decisivelyimportant in doing business and making in-vestment decisions. Improvement of gover-nance also has direct economic implications:the effectiveness and legitimacy of public in-stitutions facilitates better collection of taxes– a resource essential to sustainable develop-ment. In addition to rankings established bymultilateral institutions, many African in-itiatives havecome intobeingtosupportgovernance efforts across the continent.

NEPAD, the New Partnership forAfrica’sDe-velopment, has established a peer reviewmechanism. The Mo Ibrahim Index is a pri-vate initiative that rates governance in 48sub-Saharan African countries.

In view of the stakes involved, Coface islaunching a business climate rating thathenceforth constitutes a pillar of the Coface@rating system. The new Business Cli-mate @ratings reflect the institutionalweaknesses in individual countries and Co-face’s own experience on the quality ofavailable corporate information and creditorprotection.

OUTLOOK FOR 2008

408

Sub-Saharan African countries rank low-est based on the Coface Business Climate@ratings. Out of 34 countries rated, 18countries received a D rating – the lowestBusinesEnvironment@rating. Nine coun-tries earned a slightly better C and therewas one B. Only South Africa, Botswana,Mauritius and Namibia warrant A3, reflect-ing business environment quality equivalentto that found in the Eastern Europeancountries recently admitted to the EuropeanUnion. The Business Climate @ratingsthus clearly reflect how economic activity inthe vast majority of African countries suffersfrom the poor institutional environment andespecially from deficient corporate accountsand legal systems ill-equipped to supportdebt collection procedures.

The poor performances in businessclimate terms is largely attributable tothe fact that the level of risk in individ-ual African countries – as reflected bytheir country @ratings – has not im-proved despite better debt ratios.

■ Although economic growth has allowedcompanies to improve theircreditworthiness, the business climatehas remained poor overall


3.7%

2.7% 2.6%

3.5% 3.4% 3.5%4.3%

5.1%

6.2% 6.2%6.5% 6.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007(e)

2008(f)

0

50

100

150

200

250

300

Economic growth (%)


The good economic conditions enjoyed bySouth Africa allowed companies to improvetheir creditworthiness despite restrictivemonetary policy. This situation is reflectedby the marked levelling off of bankruptciesin 2007 and the good Coface payment inci-dent index still ranking the country belowthe world average, a trend likely to continuein 2008. Similarly, in Mauritius, even withthe traditional pillars of the economy grap-pling with hard times, improved economicconditions overall have allowed companies tobolster their creditworthiness. Conversely,

in Senegal, the increase in payment inci-dents reflects the financial crisis buffetingthe Senegal Chemical Industries. Intheothercountries, corporate payment behaviour con-tinues to suffer from the difficulties that maybe experienced in particular sectors liketextiles, hampered by Asian competition andagriculture, exposed to weather conditionsand difficulties in reorganising the cottonand peanut industries.

Oil prices have moreoveraffectedcorporateaccounts and in certain countries, the diffi-culties experienced by public and privatesuppliers of energy (electricity, petrol) facedwith the increasing cost of imported oil andthe impossibility of passing the increases onto customers has led in some cases to theemergence of payment incidents. Further-more, in certain countries, like Angola andNigeria, the poor business climate hassometimes resulted in unpredictable pay-ment behaviour.

■ Country @rating trendThe level of risk, although stable, remainshigh compared to the average for emergingcountries. Persistent weakness on gov-ernance underlies the poor perform-ance of African countries in risk terms,notwithstanding the marked improvementin financial ratios.

The main southern countries still have thebest ratings. They ally political and financialstability (Botswana, A2) despite slight de-terioration (South Africa, Mauritius, A3).With their foreign debt remaining limited,they have maintained their reputation forcreditworthiness in international capitalmarkets. In Gabon and Cameroon (B), theimprovement in the financial situation,thanks to oil revenues, has buoyed paymentbehaviour in the public sector and, in conse-quence, that of companies. Reinvigoratedpolicy on structural reforms should moreoveraccelerate diversification of their productivefabric. Non-oil countries and beneficiaries ofsubstantial debt relief, Senegal, Mozam-bique and Tanzania (B) have been steadilyimplementing structural reforms. Despitethe improved financial situation of oil coun-tries Angola (C) and Nigeria (D), theircountry @ratings have not changed with

OUTLOOK FOR 2008

409

5

their business climates remaining very diffi-cult. In Nigeria, despite a notable effort todiversify the economy, risks of spirallingtensions have increased in the wake of theApril 2007 presidential elections which weremarred by controversy. Despite good eco-

nomic conditions, deficiencies in combatingcorruption and continuing ethnic tensions –which intensified at the time of the highlydisputed elections in December 2007 – haveprevented the upgrading of Kenya’s ratingto (C).

SUB-SAHARAN AFRICA

410

AngolaPopulation (million inhabitants): 16.4GDP (US$ million): 44,033


STRENGTHS• With the peace process firmly on track,

the country’s reconstruction has begun inearnest.

• Sub-Saharan Africa’s second largest oilproducer, Angola joined OPEC inJanuary 2007 and was expected to reachthe 2 million barrel-a-day threshold latethat same year.

• The prospect of exploiting new deepwater offshore oilfields has spurred FDIinflows.

• The country’s broad economic potentialranges from diamonds to minerals,hydroelectricity, agriculture and fishingand the emergence of a middle class hasspurred development of new consumermarkets.

• The efforts made to adopt good economicmanagement since the civil war endedhas allowed the country to benefit frominternational community financialbacking.

WEAKNESSES• Underpinned by an oil sector

representing 65 per cent of GDP and90 per cent of export revenues, theeconomy is very vulnerable to a pricedownturn.

• Marked regional inequalitiescompounded by dilapidatedinfrastructure and the health and socialconsequences of 27 years of civil warhave impeded development.

• A difficult business environment hashampered the economy.

• By borrowing from China with oilresources as guarantee, Angola has beenable to skirt the IMF’s stricter conditionson reform.

RISK ASSESSMENTThe growth rate achieved by Angola in 2007was among the world’s highest, driven byincreased oil extraction and soaring worldprices. The non-oil sector – gas and civilengineering – has also contributed to theeconomic dynamism. Growth should exceed26 per cent in 2008, thanks to exploitation ofnew offshore fields and a construction sectorbuoyed by the prospect of hosting the AfricanNations Cup football championships in 2010.A notable easing of inflation in a framework

of tight fiscal policy and higher interest ratehas accompanied the economic dynamism.

The oil export revenues have allowedAngola to maintain a comfortable publicfinance situation and an excellent positionon external accounts. The strongGDPgrowthhas moreover allowed it to improve its debtratios. The fiscal and current account deficitsnonetheless continue to give cause for con-cern, reflecting an insufficiently diversifiedeconomic fabric and Angola’s failure to un-dertake major structural reforms.

ANGOLA

411

5

After many postponements the first legis-lative and presidential elections since thecivil war ended in 2002 have been announcedfor 2008 and 2009, respectively. While con-cluding the democratic transition processinitiated after the 27 years of civil war ended,they should also consolidate the pre-emi-nence of incumbent President Jose Eduardo

dos Santos’ party the Movement for theLiberation of Angola. Corruption and poorgovernance are nonetheless still endemic. Insuch conditions the establishment of a legalframework conducive to development andless-inegalitarian distribution of oil revenueswill remain uncertain.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.3 11.2 20.6 18.6 23.4 26.6Inflation (%) 98 43.5 23 12 10 8.9Public sector balance (%GDP) −6.4 −1.6 7.3 14.8 0.9 3.9Exports 9,508 13,475 24,109 31,862 38,997 55,916Imports 5,480 5,832 8,353 9,586 15,048 19,801Trade balance 4,035 7,642 15,756 22,276 23,949 36,115Current account balance (%GDP) −5.1 3.5 16.8 23.3 6.4 8.7Foreign debt (%GDP) 75 54.5 39.9 20.3 19.6 15.8Debt service (%GS exports) 23.7 16.5 10.9 8.7 4.5 3.6Foreign exchange reserves (in months ofimports)

0.9 1.6 2.9 4.3 4 5.7



■ Means of entryThe country is highly import-orientated anddependent for 90 per cent of its consumptionand investment on imported goods. Thereare no protectionist tariff barriers and dutiesrange from 2 to 30 per cent. Moves are afootto simplify import procedures. A single cus-toms document has been introduced, followedby the tendering out of pre-shipment inspec-tion. Yet Angola remains one of the mostbureaucratic countries in the world. Cloggedports and institutionalised red tape at gov-ernment departments, ports authorities andcustoms is hampering trade and economicdevelopment. Angola does not apply a pref-erential tariff to the countries comprising theSouthern Africa Development Community(SADC), as it is not a full member of this freetrade area. But it grants tax exemptions onimports intended for foreign investment pro-jects undertaken in priority areas. Exportersare strongly advised to check the creditwor-thiness and solvency of partners.Theyshoulddemand cash payment with their order, or

payment by irrevocable documentary creditconfirmed by a leading bank.

■ Attitude towards foreign investorsInvestment law reform is incomplete andfails to offer foreign investors all the guar-antees they might reasonably expect. Thesystem has been liberalised and brought intoline with that of the other SADC membercountries, but it remains complex and shorton incentives. The National Agency for Pri-vate Investment (Agencia Nacional para oInvestimento Privado, ANIP) – a one-stopshop – is attempting to group together keygovernment departments, but its operationsare unwieldy. Formalities are lengthy andapproval procedures have to be followed upby a local partner or lawyer. Legally estab-lished foreign enterprises are frequentlysubject to tax audits as well as inspectionsby the employment and health departments.The judicial system is in a critical state.Thanks to its oil business, Angola is one ofthe biggest recipients of FDI in Africa, alongwith Nigeria, South Africa and Egypt.

SUB-SAHARAN AFRICA

412

■ Foreign exchange regulationsThe kwanza (a non-convertiblecurrency)roseagainst the dollar in 2006 and 2007, tradingat AOK75 to the US dollar in September2007. It has since continued its upward

trend. The banking system is being reorgan-ised along more professional lines and hasadopted Basel-compliant prudential rules.The securities exchange, set up in 2004, isstill at an embryonic stage.

ANGOLA

413

5

OPPORTUNITY SCOPE



Mn USDMn USD


China ChileFrance USA Japan USASouthKorea

Portugal SouthAfrica

China

EXPORTS by products■ Crude oil 95%■ Diamonds 5%

■ Consumer goods 68%■ Capital goods 17%■ Intermediate goods 15%

IMPORTS by products

0

2000

4000

6000

8000

10000

0

500

1000

1500

2000

2500



Indicators Angola Regional averageEmergingcountry average

GNP per capita (PPP dollars) 2,360 2,029 5,983GNP per capita (USD) 1,980 842 2,313Human Development Index 0.445 0.450 0.672Wealthiest 10% share of national income n/a 34 31Urban population percentage 53 37 44Percentage under 15 years old 47 43 30Number of computers per 1,000 inhabitants n/a 18 50

SUB-SAHARAN AFRICA

414

BeninPopulation (million inhabitants): 8.7GDP (US$ million): 4,775

Country @rating: BMedium-term rating: High riskBusiness climate rating: C

RISK ASSESSMENTImproving trade relations with Nigeria andeasing the congestion in the Port of Cotonouspurred re-export activity in 2007. The en-ergy shortage after the drought and a timidrecovery of cotton production has, however,had a moderating effect on the economyupturn initiated in 2006. In 2008, the econ-omy should benefit at once from the normal-isation of relations with Nigeria, risingcottonproduction and continuation of the reformprogramme (withdrawal of the governmentfrom the cotton company SONAPRA andprivatisation of Port of Cotonou manage-ment). The growth is still, however, vulner-able to weather conditions, an upsurge in oilprices and a resurgence of tensions over tradewith regional partners.

Public finances continue to suffer from anarrow tax base limited by the extent of bothpoverty and the informal economy whilepublic sector investment and the settlement

of arrears have strained public spending.International aid continues, however, tolargely cover domestic financing needs. Thecurrent account balance, meanwhile, shouldcontinue to improve in 2008, thanks to theincrease in cotton exports and buoyant worldprices, which have partially offset the in-crease in capital goods imports and rising oilcosts. The reduction in the debt serviceburden as a result of the bilateral andmultilateral debt cancellation granted in2005, and the extent of international aidhave allowed Benin to largely cover itsexternal financing needs and accumulatevery comfortable foreign exchange reserves.

The slim majority won by governmentcoalition in the March 2007 legislative elec-tions will bolster President Boni Yayi’s ca-pacity to go forward with the structuralreforms initiated in several sectors includingcotton (an industry that employs a quarterof the population), electricity, telecommuni-cations and port infrastructure.

BENIN

415

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.9 3.1 2.9 3.8 4.0 5.3Inflation (%) 1.5 0.9 5.4 3.8 3.0 2.8Public sector balance (%GDP)* −3.7 −3.7 −3.6 −2.2 −6.1 −4.7Exports 289 343 343 324 384 485Imports 690 789 747 765 911 1,010Trade balance −401 −446 −423 −485 −527 −525Current account balance (%GDP)* −8.5 −7.9 −7.1 −7.1 −6.3 −5.9Foreign debt (%GDP) 47.2 34.9 36.9 10.5 11.0 11.9Debt service (%exports) 6.3 6.9 6.5 5.6 4.9 4.5Foreign exchange reserves (in months ofimports)

8.7 6.9 7.3 10.2 9.8 9.2


SUB-SAHARAN AFRICA

416

BotswanaPopulation (million inhabitants): 1.8GDP (US$ million): 10,328


STRENGTHS• Africa’s oldest multi-party democracy,

Botswana has enjoyed remarkablepolitical stability since gainingindependence in 1966.

• Transparency International has givenBotswana the best Corruption PerceptionIndex rating of any African country,ranking it 37th out of 167 worldwide.

• The country boasts extensive naturalresources including diamonds (secondlargest world producer), copper, nickeland gold.

• Strict economic policy has facilitatedmanagement of diamond revenues andallowed the country to avert the ‘DutchDisease’.

• Quality infrastructure has fostereddevelopment of tourism and services(finances, telecommunications).

WEAKNESSES• The economy is still too dependent on a

diamond sector that generates a third ofGDP, three-quarters of exports, and one-half of tax revenues.

• Diamond production should level off andthen decline sharply from 2020.

• Despite efforts to diversify the economy,poverty and joblessness are still highwith 24 per cent of the population livingon under a dollar a day and 19 per centunemployed.

• The HIV pandemic has underminedBotswana’s long-term economic andfinancial outlook with the country’s AIDSprevalence rate among the world’shighest and with 35 per cent of the adultpopulation infected with the disease.

RISK ASSESSMENTEconomic growth remained strong in 2007and it should stay on track in 2008, thanksto increased diamond production and thedynamism of the tourism and civil engineer-ing sectors, supported by robust investmentpolicy. Restrictive monetary policy shouldhelp keep inflation – heightened by the May2005 devaluation – under the 10 per centthreshold in 2008.

After running notable fiscal surpluses in2005 and 2006 with revenues higher andspending lower than expected, public fi-nances should remain near equilibrium in2008 due to spending committed to combat-ing AIDS. The current account, meanwhile,

should continue to show large surpluses,thanks to the firmness of diamond prices. Inthis context, foreign debt will remain low andforeign exchange reserves high.

The handover of power between the incum-bent President Festus Megoa and the Vice-President Ian Khama, scheduled for April2008 – over a year before the October 2009elections – is supposed to guarantee a smoothtransition in the leadership of the rulinggovernment party, the Botswana DemocraticParty. The new president should thus main-tain prudent macroeconomic policy and pur-sue the Ninth National Development Planobjectives on diversification of the productivefabric, job creation and poverty reduction.

BOTSWANA

417

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%)* 3.4 8.4 4.2 4.3 4.7 4.4Inflation (%) 9.3 6.9 8.6 11.5 7.2 6.8Public sector balance (%GDP) * −0.4 0.9 8.5 7.0 1.8 1.4Exports 3,035 3,734 4,559 4,707 4,919 5,265Imports 2,135 2,893 2,791 3,515 3,852 4,196Trade balance 900 841 1,768 1,192 1,067 1,069Current account balance (%GDP) 5.6 3.0 15.4 10.7 8.6 7.6Foreign debt (%GDP) 13.8 12.6 10.0 9.5 9.4 9.1Debt service (%exports) 3.3 3.5 2.1 1.7 1.7 1.6Foreign exchange reserves (in months ofimports)

20.7 18.4 20.8 19.5 19.8 19.9

*starting 1 April, e = estimate, f = forecast


■ Market overviewBotswana is a member of the SouthernAfrican Customs Union (SACU), along withLesotho, Swaziland, Namibia and SouthAfrica. Ad valorem tariffs and excise dutiesapply to third countries. The extension toSACU countries of the Trade, Developmentand Co-operation Agreement between theEU and South Africa ensures preferentialaccess for Botswanan products to Europeanmarkets. Under African Growth and Oppor-tunity Act (AGOA), the country’s productsmay also access the North American market.In October 2002, Botswana teamed up withother SACU members to sign a fresh customsprotocol establishing a new mechanism forresolving commercial disputes and settingcustoms tariffs. Botswana is also a memberof the Southern African Development Com-munity (SADC), which comprises 14 South-ern African countries and is headquarteredin Gaborone. The local market, however,remains narrow (less than 2 million inhabi-tants) and is mainly concentrated in townsto the east of the country.

■ Means of entryThe country’s customs regulations grantduty-free admission to commodities and ma-chinery imported for the manufacture ofproducts intended for export. Other taxmeasures include exemption from sales taxon commodities used in exported products.

Sales agents of any nationality are allowedto operate, though local agents and represen-tatives are predominant. Public invitationsto tender and large-scale work contractscomply with internationally recognised stan-dards. Imported goods are usually invoicedin rands, US dollars or pound sterling. Theeuro is starting to gain acceptance as legaltender for trade, albeit to a limited extent.Payment instruments available in Bostwanaare similar to those in Europe and the UnitedStates.

■ Attitude towards foreign investorsBotswana possesses many strengths thatmake it one of the most competitive countriesin Africa. It has a liberal economy, noexchange controls, a convertible currencyand fairly attractive tax laws, particularlyfor financial services. Corporation tax is 15per cent for manufacturing companies and25 per cent for the rest, including non-resident companies. A 10 per cent VAT wasintroduced in July 2002. Industrial relationsare peaceful. The government is neverthelessconsidering simplifying corporation tax, seenby foreign investors as too complex, via asingle rate and introducing a withholdingtax on dividends.

The Botswana Export Development andInvestment Authority (BEDIA) encouragesinvestment in the country, especially in theform of export-related projects and importsubstitution. Priority sectors include manu-

SUB-SAHARAN AFRICA

418

facturing (glass, tanneries, textiles etc), in-formation and communication technologies(ICT), tourism and financial services. Thereis an International Financial Centre, but itis having teething trouble.

The legal system is founded on commonlaw principles. Judicial procedures are veryliberal and similar to those in developedcountries. As for investment safeguards,Botswana is a signatory to both the WorldBank’s MIGA agreement and the OPICagreement with the United States. A recip-rocal investment promotion and protectionagreement with France has been undernegotiation for several years and could befinalised shortly.

■ Foreign exchange regulationsBotswana’s healthy foreign exchange re-serves allow it to be very flexible on foreignexchange matters. There are no exchangecontrols. The local currency, the pula, intro-duced after the country’s withdrawal fromthe rand area in 1976, is fully convertible.The pula though remains dependent on therand’s movement. Since 30 May 2005, Bot-swana has a crawling peg system thatenables it to carryout successiveadjustmentswhile retaining the same basket of bench-mark currencies (rand and SDR). There areno restrictions on capital transfers by non-residents. Dividends and capital can be freelyrepatriated by foreign investors upon pay-ment of 15 per cent withholding tax.

BOTSWANA

419

5

OPPORTUNITY SCOPE



Mn USDMn USD


UK SACU USA Other(Europe)

Zimbabwe SACU Zimbabwe SouthKorea

USAUK

EXPORTS by products■ Diamonds 75%■ Copper and nickel 14%■ Textiles 3%■ Other 8%

■ Electrical machinery and equipment 16%■ Foodstuffs 14%■ Fuels 13%■ Vehicles and transport equipment 13%■ Chemicals 12%■ Wood and paper 8%■ Metals 8%■ Other 17%

IMPORTS by products

0

500

1000

1500

2000

2500

3000

0

500

1000

1500

2000

2500



Indicators Botswana Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

420

Burkina FasoPopulation (million inhabitants): 13.6GDP (US$ million): 6,205


RISK ASSESSMENTIn 2007, GDP growth benefited from theincrease in cotton exports in both volume andvalue terms and the start of exploitation ofgold mines. Increased gold exports and aninflux of foreign investment linked to explo-ration for the precious metal and to itsextraction should drive growth in 2008.Cotton exports buoyed by the restructuringof cotton companies should also contribute tothe economic dynamism. With the develop-ment of manufacturing impeded by deficientinfrastructure, however, the economy hasnonetheless remained highly dependent onthe agricultural sector, which employs 80 percent of the population, and thus very vulner-able to weather conditions.

The narrowness of a tax base limited bythe extent of poverty and a large grey markethas undermined the fiscal balance withspending on education, health, electricity-price subsidies and infrastructure remaininghigh. External accounts are undermined by

a structural imbalance. The deterioration ofthe terms of trade that developed in recentyears amid soaring oil prices should stabilise,however, thanks to the firmness of cottonprices and the growth of gold exports. Thecountry has nonetheless remained very de-pendent on international aid notwithstand-ing the substantial reduction of foreign debtgranted under the HIPC and MDRI pro-grammes.

The May 2007 legislative electionsstrengthened the position of President BlaiseCompaore, in office since 1987. The largeparliamentary majority should enable himto go forward with the reforms undertaken;especially those intended to improve thebusiness environment. President Compaore,moreover, enhanced his regional and inter-national stature by the decisive roleheplayedin the March 2007 conclusion of the Ouaga-dougou agreement calling for the formationof a national unity government in IvoryCoastand specifying the steps to reunify thecountry.

BURKINA FASO

421

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 8 4.6 7.1 6.4 4.3 6.1Inflation (%) 2 −0.4 6.4 2.4 0.5 2Public sector balance (%GDP)* −8.2 −8.3 −8.5 −9.6 −11.8 −10.3Exports 321 472 479 611 706 785Imports 685 944 1,056 1,189 1,314 1,428Trade balance −365 −472 −577 −578 −608 −642Current account balance (%GDP)* −12.7 −13.6 −14.9 −13.7 −13.8 −13.4Foreign debt (%GDP) 40.6 38.5 36.5 20.3 22.6 26.2Debt service (%exports) 12.8 8.6 8.5 6.2 4.3 4.4Foreign exchange reserves (in months ofimports)

5.6 6.0 4.1 4.2 6.0 5.4


SUB-SAHARAN AFRICA

422

BurundiPopulation (million inhabitants): 7.8GDP (US$ million): 807


RISK ASSESSMENTEconomic growth stalled in 2007 due to alack of rain that affected as much thehydroelectric power supply as coffee produc-tion, Burundi’s main export product. Subjectto better weather conditions, economic activ-ity in this country in process of reconstructionshould rebound, driven by the public workssector, consolidation of the banking sectorand development of retailing. In view of thedemographic pressure, the growth – moreo-ver vulnerable to external shocks – willremain insufficient to significantly reducepoverty in a country ranking as the world’sthird poorest. Defective energy infrastruc-ture notably impeding mining sector devel-opment (nickel) has undermined thecountry’s growth potential.

In this context, Burundi’s accounts showsevere imbalances with financing needs re-maining covered by international aid, whichresulted in 2005 in Paris Club debt resched-uling after the country reached the ‘comple-tion point’ under the HIPC programme forhighly indebted poor countries. Substantial

relief of foreign debt continues to depend,however, on a speed up of structural reforms.

Political and security risk is still high withthe Burundi’s stability undermined by thesuspension in July 2007 of the peace talkswith the last Hutu rebel group, the NationalLiberation Forces and the resurgence oftensions on the occasion of the establishmentof the Truth and Reconciliation Commissionand the Special Court for judging war crimes.The government has moreover been strug-gling to organise the return of 350,000 Huturefugees and release of international aidhinges on the resolution of the institutionalcrisis paralysing the country for over a year.This will require restoring the NationalUnity Government set up in 2005 after 12years of civil war, then dissolved in 2006.Burundi’s integration into the East AfricanCommunity in 2006 and the revival of theEconomic Community of the Great LakesCountries in April 2007 could ultimatelybenefit Burundi’s economy and allow thecapital in Bujumbura to recover its role as aregional hub for wholesale and retail sales.

BURUNDI

423

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) −1.2 4.8 0.9 5.1 3.5 5.8Inflation (%) 10.7 8.0 13.6 2.7 5.3 5.7Public sector balance (%GDP)* −13.8 −19.7 −16.8 −21.5 −22.7 −19.6Exports 38.0 48.0 57.0 60.8 70.0 73.4Imports 126 149 239 286 273 301Trade balance −88 −101 −182 −225 −203 −228Current account balance (%GDP)* −21.3 −25.5 −34.2 −36.8 −37.5 −33.3Foreign debt (%GDP) 225 220 184 164 147 132Debt service (%G& S exports) 75.5 95.7 39.6 42.7 31.4 30.2Foreign exchange reserves (in months ofimports)

4.4 3.3 3.5 3.4 4.1 4.1


SUB-SAHARAN AFRICA

424

CameroonPopulation (million inhabitants): 16.7GDP (US$ million): 18,323


STRENGTHS• Endowed with vast resources ranging

from agriculture, wood, mining andtourist potential to oil, gas andhydroelectric energy Cameroon boastsone of Central Africa’s most diversifiedeconomies.

• Implementation of far-reachingstructural reforms allowed Cameroon toobtain in 2006 a 50 per cent reduction ofits foreign debt under the HIPC andMDRI programmes.

• The structural reforms have attractedinvestors and accelerated the process ofdiversifying the productive fabric.

WEAKNESSES• With government finances still too

dependent on oil production (30 per centof tax revenues and 50 per cent ofexports), the projected decline of oilresources has made rapid development ofalternative revenue sources a necessity.

• A poor business environment hashampered development of a formalprivate sector contending with intensecompetition from the informal economy.

• The growth still does not suffice to meetthe Millennium Objectives notablyintended to cut poverty in half by 2015.

• The political succession crisis looming inthe run-up to elections in 2011 couldjeopardise the country’s politicalstability.

RISK ASSESSMENTEconomic growth accelerated in 2007, drivenby the increased volume of oil exports,spurred by the upward price trend, and by adynamic non-oil sector. Growth should speedup again in 2008 amid increasing FDI in ma-jor industrial projects (aluminium,hydroelec-tric power stations) and the recovery of publicsector investments (urban, road and port in-frastructure) buoyed by the increase in oil rev-enues and new fiscal room for manoeuvre.

The process of consolidating public financeshas continued, thanks to better realisation ofnon-oil revenues. The steadiness of the publicsector balance is also the result, albeit worry-ingly, of a failure to carry out all spendingbudgeted to combat poverty. The current ac-count, meanwhile, continues to show a slight

deficit with oil exports still not sufficing to off-set the deficit in the services balance and inrevenues undermined by oil company profitrepatriation. In this context, the debt ratios –significantly lower since the debt reliefgranted under the HIPC and MDRI pro-grammes – have remained sustainable.

The July 2007 legislativeelections,markedby low voter turnout, gave a large majority toPresident Paul Biya, in office since 1986. Thenew assembly should approve a constitu-tional amendment allowing the incumbentpresident to run for a third term in 2011. Thiscould result in a heightening of tensions.

At the regional level, the agreement signedwith Nigeria in June 2006 guarantees Came-roon’s sovereignty over the Bakassi Penin-sula and its extensive oil resources.

CAMEROON

425

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.0 3.7 2.6 3.8 4.2 4.9Inflation (%) 0.6 0.3 2.0 5.1 1.8 1.8Public sector balance (%GDP) 0.7 -0.8 3.0 4.6 1.0 1.0Exports 2,638 2,580 2,862 3,491 3,913 3,874Imports 2,374 2,637 2,830 3,127 3,491 3,646Trade balance 264 −57 32 364 422 228Current account balance (%GDP) −2.6 −3.8 −3.4 −0.8 −2.8 −3.9Foreign debt (%GDP) 73.5 60.3 36.7 5.0 5.6 6.7Debt service (%Exports) 28.1 7.1 6.7 13.7 16.4 19.5Foreign exchange reserves (in months ofimports)

2.0 2.4 2.6 3.3 3.0 2.5


CONDITIONS OF ACCESS TO THE MARKET■ Market overviewThe Cameroon market is open to imports andthe authorities apply no special protectionistmeasures or tariff barriers, except for ahealth embargo on animal products fromareas infected by BSE and avian flu. Customsduties on imports into the Economic andMonetary Community of Central Africa(EMCCA) area, subject to the Common Ex-ternal Tariff, range from 5 per cent for staplecommodities, 10 per cent for raw materialsand capital goods, 20 per cent for semi-finished and miscellaneous products to 30per cent for some consumer goods. In addi-tion, there is 19.25 per cent VAT, from whichstaple commodities are exempt, as well as 25per cent excise duty on so-called luxuryproducts, cigarettes, wines and spirits andmost non-alcoholic beverages. The averagetime for a container to clear customs is twoto three weeks. Exporters are strongly ad-vised to demand cash payment upon confir-mation of the order, or payment byirrevocable letter of credit confirmed by afirst-rate bank.■ Attitude towards foreign investorsCameroon has an open policy towards FDI.Law no. 2002/004 of 19 April 2002, also called

the Investment Charter, is a general piece oflegislation that is supposed to be supple-mented with sector regulations. About 40 orso sectors have been earmarked for ad hoclaws. To date, only mining, gas and oillegislation has been passed. The remainingsectors are still, de facto, governed by theinvestment act 1990. Officially, this law isbacked by other arrangements designed toattract foreign capital, such as membershipof the Organisation for the Harmonisation ofBusiness Law in Africa (OHBLA), whichaims to provide a more secure legal environ-ment for business, an industrial free zoneregime (which exists only on paper) and aninvestment promotion agency. In practice,however, numerous obstacles remain, dis-couraging all too often any new investors.These include widespread corruption,administrative harassment, poor transportinfrastructure, power failures and a malfunc-tioning judicial system. Consequently, Cam-eroon is ranked 154 out of 178 countries inthe World Bank’s Doing Business2008report– which measures ease of doing business –and has shown no improvement these lastfew years.

SUB-SAHARAN AFRICA

426

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Oil and oil products 54%■ Foodstuffs 16%■ Wood and wood charcoal 15%■ Cocoa 7%■ Aluminium 5%■ Cotton 4%

■ Hydrocarbons 30%■ Machinery and transport equipment 20%■ Other manufactured goods 19%■ Foodstuffs 18%■ Chemicals 11%■ Other 2%

IMPORTS by products

Spain FranceItaly SouthKorea

Netherlands France ChinaNigeria Belgium USA0

200

400

600

800

1000

0100200300400500600700800



Indicators Cameroon Regional averageEmergingcountry average


CAPE VERDE

427

5

Cape VerdePopulation (inhabitants): 518,311GDP (US$ million): 1,144


RISK ASSESSMENTEconomic growth reached 6.9 per cent in2007, driven by a dynamic tourist sector thatspurred public and private investment in thebuilding and public works and services sec-tors. It should exceed 7.0 per cent in 2008and contribute to a reduction in unemploy-ment below the 20 per cent threshold. Thesustainability of economic development cen-tred on high-end tourism has, however, comeup against the shortage of skilled labour.

Imbalances have persisted in public ac-counts despite tight fiscal policy. Externalaccounts, meanwhile, are structurally indeficit, indicative of an insufficiently diversi-fied productive fabric. Remittances fromexpatriates, representing nearly 20 per centof GDP have not sufficed to offset a tradedeficit exacerbated by capital goods importsas well as oil and foodstuff purchases, whose

prices have been trending up. Too developedto qualify for the HIPC and MDRI pro-grammes, the country has high foreign debt.International aid and FDI direct inflowshavelargely covered the financing needs.

The country has enjoyed great politicalstability since the early 1990s highlighted byfour free and democratic elections and twopolitical changeovers. The government inpower since 2006 has the support of a largeparliamentary majority that has allowed itto pursue reforms fostering development ofthe private sector and FDI. Cape Verdebecame the 152nd member of the WTO inDecember 2007, and it is now on the verge ofleaving the Less-Advanced-Country sub-group. In this context, Cape Verde hopes toset up a privileged partnership with the EUfocused particularly on trade and investmentissues but also on immigration and combat-ing organised crime.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.7 4.4 5.8 6.5 6.9 7.5Inflation (%) 1.2 -1.9 0.4 5.4 2.5 1.8Public sector balance (%GDP)* -9.0 -7.9 -12.8 -9.6 -9.3 -8.4Exports 53 58 89 84 84 95Imports 344 389 438 559 894 949Trade balance -291 -331 -349 -475 -810 -854Current account balance (%GDP)* -15.4 -12 -8.0 -10.6 -15.9 -19.2Foreign debt (%GDP) 66.2 73.1 60.0 48.4 43.2 41.1Debt service (%G&S exports) 10.7 11.4 8.6 5.9 5.1 5.7Foreign exchange reserves (in months of imports) 1.9 2.6 2.8 3.0 3.1 3.2


SUB-SAHARAN AFRICA

428

Central AfricanRepublicPopulation (million inhabitants): 4.1GDP (US$ million): 1,486


RISK ASSESSMENTThe economy continued to grow at a 4 percent clip in 2007, driven by the recovery ofinvestment in mining extraction (diamond,gold and uranium), oil exploration and tele-communications. The growth of ore exportsin value terms also contributed to the goodeconomic performance. Household consump-tion moreover benefited from rising ruralincomes – associated with improved farmproductivity – and regular payment of civilservice wages. Those trends should continuein 2008, amid a resumption of internationalaid. Defective transport and energy infra-structure continue however to underminethis landlocked country’s growth potential.

Public sector finances improved signifi-cantly in 2007, thanks to better resourcemobilisation and efforts to control spending.Pursuit of prudent fiscal policy should makeit possible to stabilise the public sector deficitthis year at a level below 3 per cent. Largeexternal account imbalances have mean-while persisted. The increase in diamond andwood exports in value terms spurred bydemand from China has struggled to offsetthe increase in capital goods imports gener-ated by the investment upturn. The growingoil bill has also undermined the trade bal-

ance. The services balance meanwhile hassuffered from the country’s landlocked con-dition which results in high transport costs.In this context, covering internal and exter-nal financing needs still depends on interna-tional aid. The country which has restorednormal relations with multilateral financialinstitutions particularly by settling its ar-rears with the World Bank and AfricanDevelopment Bank became eligible in March2007 for the HIPC programme. It will how-ever only be able to benefit from debt reliefafter successfully implementing the struc-tural reform programmes agreed with theIMF in 2006.

The security situation remains unstableundermining the economic catch-up process.The ongoing armed rebellion in the country’snorthern region has hampered diamond andgrain production and exploration for oil.President Francois Bozize has initiated anational dialogue with two of the three mainrebel groups agreeing to participate. Theprocess will however have little chance ofreaching agreement quickly on the resource-sharing issue especially in the Northeast. Inthis context the intervention this year byEuropean peacekeeping forces should makeit possible to prevent the turmoil fromspreading throughout the region.

CENTRAL AFRICAN REPUBLIC

429

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) -7.6 1.3 2.2 4.1 4.0 4.3Inflation (%) 4.4 -2.2 2.9 6.7 3.0 2.3Public sector balance (%GDP)* -4.6 -5.5 -8.5 -4.7 -2.7 -2.7Exports 126 129 128 158 189 201Imports 119 151 171 203 220 248Trade balance 7.0 -22 -43 -46 -32 -46Current account balance (%GDP)* -6.2 -6.1 -8.7 -8.1 -7.1 -7.9Foreign debt (%GDP) 109 90 77 77 67 63Debt service (%G&S exports) 21.8 27.1 18.8 19.8 20.1 20.9Foreign exchange reserves (in months of imports) 7.2 7.7 7.3 5.7 5.5 4.9


SUB-SAHARAN AFRICA

430

ChadPopulation (million inhabitants): 10.0GDP (US$ million): 6,541


RISK ASSESSMENTThe discovery of oil fields has driveneconomicgrowth since 2000, spurring investmentsextraction and pipeline construction. Thegradual depletion of resources and technicalfailure seem however to be limiting oilproduction. Economic growth nonethelessrebounded slightly in 2007, spurred by soar-ing prices and could even reach 4 per centthis year driven by Chinese investments inoil exploration. The economy should alsobenefit from a dynamic telecommunicationssector and subject to good weather conditionsan increase in farm production – with agri-culture employing 70 per cent of the popula-tion. In the longer term, the development ofChad (ranked 173rd out of 177 on the HumanDevelopment Index) rests on further diver-sification of the productive fabric, which willnotably come up against the scarcity ofskilled labour and the deficiencies of abusiness climate marked especially by cor-ruption.

The normalisation of relations with theWorld Bank in 2006 enabled oil revenuesbelonging to the budget to be unfrozen and a

slight budget surplus to be maintained in2007. But the public budget should be pen-alised in 2008, with public expenditures onthe rise notably in the security and infra-structure sectors. The trade balance shouldcontinue to benefit from the upsurge in oilprices notwithstanding the substantial dis-count applicable to Chadian crude. Theinvestment−income balance meanwhile hasremained deeply in deficit undermined bydividend repatriation by oil companies. Inthis context, the current account continuesto show a deficit. Nevertheless, incomingFDIlargely covers financing needs.

Despite the peace accords concluded underLibya’s supervision in October 2007, rela-tions between President Idris Deby and theEast Chadian have remained tense. Thepresident should however be able to leveragedivisions among rebel factions and reconcili-ation with the group from Libreville to regaincontrol over the political situation. The ten-sions building up in Darfur again couldhowever spread to neighbouring countriesespecially Chad, notwithstanding the highlycontroversial interposition of a joint UN/EUpeacekeeping force this year.

CHAD

431

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 14.7 33.6 7.9 0.5 1.5 4.1Inflation (%) -1.8 -5.4 7.9 7.9 3.0 3.0Public sector balance (%GDP)* -14 -6.0 -3.7 0.5 0.9 -11.2Exports 604 2,165 3,113 3,749 4,219 4,371Imports 781 876 813 1,006 1,157 1,382Trade balance -177 1,288 2,300 2,743 3,062 2,989Current account balance (%GDP)* -51 -15.2 -9.0 -8.6 -3.2 -5.2Foreign debt (%GDP) 57 39 30 24 25 27Debt service (%G&S exports) 8.9 2.3 1.5 1.8 1.8 1.9Foreign exchange reserves (in months ofimports)

1.1 1.0 0.8 1.9 4.7 3.9


SUB-SAHARAN AFRICA

432

CongoPopulation (million inhabitants): 4.1GDP (US$ million): 7,385


RISK ASSESSMENTEconomic growth slowed markedly in 2007as a result of the decline in oil production.The economy should rebound in 2008 withgrowth exceeding 7 per cent, thanks to startof exploitation of new oil fields. Lackingdiversification, the economy has been verydependent on an oil sector representing 55per cent of GDP and 95 per cent of exports.The non-oil sector, which presents greatdevelopment potential, particularly in agri-culture, forestry and construction, shouldalso experience strong growth, driven bylarge public investments. Dilapidated infra-structure and governance shortcomingsshould, however, continue to hamper eco-nomic activity.

Public sector accounts continued to showlarge surpluses in 2007 despite substantialslippage on public spending. External ac-counts have also benefited from the oilwealth. Reforms undertaken in the manage-ment of that wealth along with efforts madeon governance allowed President Sassou-Nguesso to obtain in November 2007 cancel-

lation of 80 per cent of the country’s tradedebt from the London Club and of virtuallyall debt with the Paris Club. Fiscal laxityhas, however, delayed agreement on a pov-erty reduction programme pending with theIMF since 2004, and, thereafter, debt relieffrom multilateral institutions under theMDRI programme. In this context, theCongo’s per capita debt is among the highestin the world.

In 2008, the political scene will be markedby preparations for the presidential electionsscheduled in 2009. The Congo’s politicalstability should not, however, be in jeopardywith President Sassou-Nguesso’s CongoleseLabour Party emerging from the August2007 legislative elections with an over-whelming majority. President Sassou-Nguesso hopes to capitalise on the currentsituation to unify all pro-presidential partiesand establish himself as ‘father to the entirenation’. There are nonetheless still majorrisks. Besides a nettlesome social situation,violent incidents between the army and therebels have irrupted repeatedly in the Poolregion despite the March 2003 peace treaty.

CONGO

433

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 0.8 3.5 7.8 6.1 3.7 7.3Inflation (%) 1.5 3.6 2.5 4.8 7.0 5.0Public sector balance (%GDP)* 0.4 3.6 15.7 19.7 9.9 15.3Exports 2,598 3,459 4,875 6,387 5,036 6,153Imports 810 1,100 1,274 1,533 1,563 1,732Trade balance 1,788 2,359 3,600 4,855 3,473 4,421Current account balance (%GDP)* 1.0 1.8 10.9 15.3 7.6 9.9Foreign debt (%GDP) 267.7 198.7 103.2 78.2 85.7 73.0Debt service (%G&S exports) 26.8 22.0 25.6 19.6 17.5 12.5Foreign exchange reserves (in months ofimports)

0.2 0.4 2.2 4.3 6.2 8.1


SUB-SAHARAN AFRICA

434

Democratic Republicof CongoPopulation (million inhabitants): 59.3GDP (US$ million): 8,543


RISK ASSESSMENTAfter posting respectable performance from2001 to 2005, the country’s economic situa-tion deteriorated after the suspension of IMFbacking in the 2006 and 2007 pre-electionand post-election periods. The mineral ex-traction sector should be the main growthdriver in 2008, with an increase in foreigninvestment, while financial backers willlikely focus their aid on road and railinfrastructure.

To foster sustainable growth and reducepoverty, improving the security, health andeducation situation will be crucial along withcombating corruption and the illegal exploi-tation of natural resources, privatising state-owned companies and significantlyimproving the business environment. Threedecades of lax economic management have

resulted in unsustainable foreign debt and alarge stock of arrears with Paris Club credi-tors. The main objective of President JosephKabila’s administration thus entails reach-ing by mid-2008 the HIPC programme com-pletion point in order to obtain foreign debtrelief in the HIPC bilateral framework andthe MDRI multilateral framework. This willnotably require better public finance man-agement. The Democratic Republic of Congowill benefit concurrently from US$5 billionin loans from China, allocated to rail, roadand mining infrastructure, but that couldjeopardise the sustainability of even thereduced debt remaining after the cancella-tions granted. Moreover, the security situa-tion is still critical in Kivus, the easternregion bordering on Rwanda and Burundi,scene of several intertwined conflicts.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.7 6.6 6.5 5.1 6.5 6.2Inflation (average annual rate) 12.9 4.0 21.4 13.2 17.4 9.0Public sector balance (%GDP) −5.9 −6.1 −9.6 −10.7 −9.0 −5.5Exports 1,340 1,813 2,071 2,320 2,520 3,033Imports 1,496 1,753 2,473 2,740 2,879 3,517Trade balance −156 60 −402 −420 −359 −484Current account balance (%GDP) −9.8 −7.4 −15.6 −15.6 −15.3 −15.8Foreign debt (%GDP) 198.1 175.8 153.1 149.3 129.9 87.1Debt service (%Exports) 8.0 21.9 25.6 19.6 17.5 12.5Foreign exchange reserves (in monthsof imports)

0.5 1.2 0.5 0.5 0.5 0.7

e = estimates, f = forecast

DJIBOUTI

435

5

DjiboutiPopulation (inhabitants): 805,657GDP (US$ million): 757


RISK ASSESSMENTDjibouti posted strong economic growth in2007, driven by public and foreign invest-ment in port infrastructure and the construc-tion sector. That dynamism should gainmomentum in 2008, thanks to the continuingefforts to ease the congestion in the Port ofDjibouti and the development of the newDoraleh oil complex. The growth will none-theless not suffice to meet the MillenniumDevelopment Goals. In this context, most ofthe rural population – vulnerable to weatherconditions – remains dependent on interna-tional food aid. The existing currency boardforeign exchange regime, meanwhile, withthe Djibouti franc pegged to the dollar since1973, has allowed the country to limit infla-tion.

Despite favourable economic conditions,the imbalance in public sector accounts haspersisted. A lack of progress on fiscal policyhas moreover prompted the IMF to opposesince 2005 an extension of the Poverty

Reduction and Growth Facility. The growthof capital goods imports needed for invest-ments has, meanwhile, continued to widenthe external deficit. The high proportion ofexports involving re-export business fromEthiopia or Somalia reflects the lack ofdiversification of the productive fabric andthe great dependency of the economy onspending by foreign troops stationed in Dji-bouti.

The legislative elections in January thisyear should confirm the pre-eminence of thePresident Ishmael Omar Guelleh and hiscoalition, the Union for the PresidentialMajority, in the local and national politicalscene. Regional instability could, however,jeopardise that shaky national equilibrium.A severe deterioration of the security andpolitical situation in Somalia with repercus-sions throughout the Horn of Africa consti-tutes indeed an appreciable risk. It couldhave a significant impact on Djibouti’s econ-omy, which is largely dependent on regionaltrade.

SUB-SAHARAN AFRICA

436


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.2 3.0 3.2 4.8 4.8 5.7Inflation (%) 2.0 3.1 3.1 3.6 3.5 3.5Public sector balance (%GDP)* −8.3 −8.7 −6.0 −6.3 −9.1 −10.6Exports 37 34 40 50 146 237Imports 238 261 277 346 514 649Trade balance −201 −227 −237 −296 −368 −412Current account balance (%GDP) 3.4 −1.3 1.2 −8.9 −13.9 −16.9Foreign debt (%GDP) 67 68 61 56 58 64Debt service (%G& S exports) 7.5 9.1 9.0 8.1 5.8 4.8Foreign exchange reserves (in months ofimports)

3.9 3.3 2.9 3.2 2.4 2.4


ERITREA

437

5

EritreaPopulation (million inhabitants): 4.5GDP (US$ million): 1,085


RISK ASSESSMENTGrowth remained sluggish in 2007. And anupturn will be unlikely in 2008 due to lowproductivity in the farm sector, which em-ploys 77 per cent of the population, and abusiness climate that has hampered privatesector development. The substantial militarymobilisation has diverted manpower andthus undermined the workforce in productivesectors. The poor state of Eritrea’s relationswith international financial institutions hasbeen detrimental to development of the aidgranted and has limited investment inflows.Far-reaching Chinese projects involving asmuch infrastructure (Port of Assab) as min-ing extraction should, however, support eco-nomic growth in the medium term.

Stoked by structural fiscal deficit, inflationhas remained above 15 per cent. Externalimbalances also constitute nettlesome prob-lems. Even if the current account deficitshould continue to narrow amid new importrestrictions, financing needs still remainlarge and the level of foreign exchange

reserves critically low. Covering the financ-ing needs is all the more delicate with thepresident pursuing a policy of refusal ofinternational aid. With Eritrea thus notincluded among the beneficiaries of the HIPCand MDRI programmes, the level of foreigndebt remains unsustainable.

National elections have been postponedsince December 2001 with the single party,the Popular Front for Democracy andJustice,seeming likely to tighten its grip on powerunder President Isaias Afewerki’s leader-ship. And the border dispute pitting Eritreaagainst Ethiopia has intensified in the wakeof a new failure by the International Arbitra-tion Commission to trace a dividing lineacceptable to both parties. Eritrea’s supportfor the Islamic militias in Somalia hasmoreover been perceived as the opening of asecond front by Ethiopia, which has mean-while been backing the Somali interim tran-sition government. Renewed hostilitiesbetween Eritrea and Ethiopia constitute anappreciable risk.

SUB-SAHARAN AFRICA

438


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.1 1.9 0.5(*) 2.0 2.0 2.0Inflation (%) 22.6 21.5 19.9 15.0 15.5 16.0Public sector balance (%GDP) -37 -39 -30 -26 -26 -25Exports 21 14 14 16 17 19Imports 534 548 558 571 569 572Trade balance -513 -534 -544 -555 -552 -553Current account balance (%GDP) -27.0 -28.9 -30.5 -28.2 -25.4 -22.3Foreign debt (%GDP) 105 109 74 69 67 63Debt service (%G&S exports) 31.8 34.3 33.6 38.8 40.7 47.6Foreign exchange reserves (in months of imports) 0.5 0.7 0.5 0.5 0.4 0.4


ETHIOPIA

439

5

EthiopiaPopulation (million inhabitants): 72.7GDP (US$ million): 13,315


RISK ASSESSMENTFor the fourth straight year Ethiopiaachieved strong growth in 2007, up nearly 10per cent. The agricultural sector, represent-ing 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 recordharvests again in 2007–2008, which will begood for the food industry and exports. Inthis context, the tighter monetary policyadopted in 2007 should help stem inflationthat has been above 10 per cent since 2005,stoked by household consumption and theincreasing cost of credit.

A narrow tax base continues to underminepublic finances. With international aid onlycovering part of its financing needs, thegovernment has turned increasingly to do-mestic borrowing. External accounts havealso remained deep in deficit with growth inthe value and volume of coffee and goldexports not sufficing to offset rising capitalgoods imports and the increasing cost of oil.

International long-term loans and foreigndirect investment have, however, been cov-ering external financing needs. Ethiopia hasthus been able to accumulate foreignexchange reserves albeit to an insufficientextent. Debt relief granted under the HIPCand MDRI programmes, respectively, in2004and 2006, substantially reduced a debt bur-den that had become unsustainable in themedium term.

Despite notable efforts to foster nationalreconciliation, the government’s popularityhas slackened since the sharp increase inbasic foodstuff prices. It has moreover beencontending with the insurrection of a jumbleof armed groups, linked by ethnic and relig-ious affinities, particularly in Ogaden, in theeastern part of the country. The still-unset-tled border-demarcation issue with Eritreacould lead to renewed hostilities in a contextof re-armament of the protagonists and ofregional tensions. The Ethiopian army’s in-volvement in Somalia exacerbates further-more the risk of regionalising the conflicts.

SUB-SAHARAN AFRICA

440


USD millions 2002/3 2003/4 2004/5 2005/6 2006/7(e) 2007/8(f)

Economic growth (%) −3.3 11.9 10.5 9.6 9.4 8.5Inflation (%) 15.1 8.6 6.8 12.3 17.0 12.6Public sector balance (%GDP)* −14.8 −8.1 −9.4 −8.5 −10.3 −10.0Exports 483 600 600 1,000 1,099 1,246Imports 1,856 2,587 3,633 4,593 4,990 5,602Trade balance −1,373 −1,987 −2,786 −3,593 −3,891 −4356Current account balance (%GDP)* −9.8 −10.2 −13.4 −16.9 −13.1 −11.5Foreign debt (%GDP) 83.9 77.7 52.9 44.9 13.1 14.9Debt service (%exports) 7.8 6.7 5.8 5.1 1.4 1.2Foreign exchange reserves (inmonths of imports)

3.7 3.8 3.5 2.5 2.2 2.4


GABON

441

5

GabonPopulation (million inhabitants): 1.4GDP (US$ million): 9,546


STRENGTHS• Africa’s third largest oil producer, Gabon

also expects to become the world’sleading manganese producer by 2010,and, endowed with still-underexploitedforestry potential, is already the secondlargest wood producer.

• Gabon also enjoys extensive potential inmining (iron, niobium), hydroelectricityand tourism.

• With structural reforms undertaken todiversify the productive fabric, thegovernment has won the support ofinternational financial institutions.

• The international community backingresulted in 2004 in agreement with theParis Club on foreign debt reschedulingwhile the country is not eligible for theHIPC programme.

• Political stability has enhanced Gabon’sattractiveness to investors.

WEAKNESSES• The economy is still too dependent on an

oil sector representing 54 per cent ofGDP, 80 per cent of exports and 63 percent of tax revenues.

• With gradual depletion of ultimatelylimited oil reserves, production willineluctably level off and then decline inthe next decade.

• The high cost of factors of productionassociated with deficient infrastructurehas undermined Gabon’scompetitiveness.

• A still-difficult business environment andinadequate institutional capacities haveimpeded economic development.

• High per capita income notwithstandingfurther improvement in poverty,education and health indicators willdepend on meeting substantialchallenges.

RISK ASSESSMENTEconomic growth soared in 2007 driven bythe increase in oil production and the dyna-mism of the constructionandservicessectors.It should slow slightly this year with oilproduction levelling off but with direct in-vestment in mining – notably the Belingairon mine – and the forestry sector showingrenewed dynamism.

Gabon’s fiscal position should grow evenstronger in 2008, thanks to higher revenuesfrom oil and manganese, whose prices havebeen trending up. Large fiscal surpluseshave, however, masked a narrow tax basewith broadening it being a continuing strug-

gle despite efforts on reforms. External ac-counts have also benefited from the oilwealth. The surpluses, in conjunction withadherence to the IMF programme agreed for2004 and 2005 have allowed Gabon to con-solidate the macroeconomic framework andsubstantially reduce outstanding debt.

The December 2006 legislative electionsbore out the pre-eminence of the GaboneseDemocratic Party. President Omar BongoOdimba, re-elected in November 2005 with80 per cent of the votes cast, has been inoffice since 1967. His succession will none-theless be unlikely to become an issue anytime soon with the president apparently

SUB-SAHARAN AFRICA

442

determined to complete his term in office,which extends until end 2012. And the ef-forts deployed to maintain an ethnic balance

within the government should ensure thecountry’s continued stability.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.4 1.3 3.0 1.2 5.6 4.2Inflation (%) 2.1 0.4 0.0 4.0 5.5 3.0Public sector balance (%GDP) 7.4 7.4 7.8 8.6 9.7 11Exports 3,556 4,661 5,717 6,055 6,377 7,148Imports 1,167 1,500 1,370 1,583 1,960 2,171Trade balance 2,390 3,161 4,348 4,471 4,417 4,977Current account balance (%GDP) 6.70 12.6 15.0 19.2 16.8 16.6Foreign debt (%GDP) 73.2 64.9 44.6 38.8 31.8 24.8Debt service (%G&S exports) 16.9 14.7 9.6 11.2 11.3 10.3Foreign exchange reserves (in months ofimports)

0.7 1.3 2.1 3.3 3.7 4.6



■ Market overviewThe Gabonese market is very open. Thecountry’s tariff system is common and con-sists of the common external tariff (CET) andthe internal and external general preferen-tial tariff (GPT) of the CEMAC. In principle,it grants duty-free access to goods from othermember countries. In practice, however, thecustoms union does not work too well. Anumber of tariff and non-tariff barriersremain, including double duties on productsimported from third countries, poor applica-tion of rules of origin for CEMAC productsand conditional, exceptional or discretionaryduty-free treatment and exemptions. Dutiesvary between 0 per cent for some goods suchas medical equipment and stationery, 6 percent for basic staples, 11 per cent for rawmaterials and capital goods, 21 per cent forsemi-finished goods and 31 per cent forconsumer goods.

The most strongly recommended means ofpayment is the irrevocable and confirmedletter of credit. Documentary collection uponpresentation of a complete set of bills oflading and bills of exchange should only beused if the customer is well known to theexporter. Bank transfers and cheques, forwhich the customer incurs no liability,should

be avoided. Exporters shouldexercisecautionwhen dealing with government agencies. Forall public-sector orders, it is necessary toobtain a copy of the official purchase orderissued by the Budget Expenditure Office atthe Ministry of Finance. Contractsandordersplaced by the government with a foreignsupplier must be countersigned by the Direc-tor-General of Public Accounts. Suppliersareadvised to check the relevant tax clauseswith the departments concerned.

■ Attitude towards foreign investorsThe legislative and regulatory environmentis extremely liberal and the attitude ofgovernment officials generally positive. In-vestors enjoy free trade through CEMAC,modern instruments of business law throughOHADA and investment security throughthe MIGA, the World Bank and the ICSID.However, the judicial process remainslengthy and sentences are often arbitrary, asindicated in the reports drawn up by ConseilFrancais des InvestisseursenAfrique(CIAN)in 2004 and by Foreign Investment AdvisoryService (FIAS).

The country’s Investment Charter providesfor freedom of enterprise, the right to property(including intellectual property), access to for-eign currency, free movement of capital, etc.From time to time, it is supplemented with

GABON

443

5

special laws (forestry act – adopted in Decem-ber 2001, investment act, mining act, oil act,labour act, competition act).

So far as oil is concerned, Gabon undoubt-edly offers oil companies the best terms ofinvestment in sub-Saharan Africa. New pro-duction sharing arrangements (CPPs – Con-trats de partages de production) with Gaboncontain extremely favourable terms for oilcompanies, including quicker depreciation ofoil exploration costs, lower taxation andhigher oil profits than neighbouring rivals.

In 2005, the government set up a Compe-tition Directorate and a National Commis-sion Against Illicit Gain at the Ministry ofCommerce. It also strengthened the PublicProcurement Directorate. Gabon became amember of the Extractive Industries Trans-parency Initiative in 2004. EITI publishedits first report in 2005 and its second in 2006.At the EITI Oslo conference, Gabon wasdesignated one of the most cooperative coun-tries in this field.

The country’s Private Investment Promo-tion Agency (APIP), set up in 2002, is a one-

stop shop for investors that provides themwith practical information. Its services con-tinue to be improved, especially as regardsthe time required to obtain administrativedocuments.

The Gabonese Employers Federation(CPG) gives entrepreneurs proper supportand is proactive rather than reactive. In2004, it advised the government to set up agovernment creditors’ club – the LibrevilleClub – for the settlement of domestic debt.In 2004, 2005 and 2006, Libreville Clubs I,II and III enabled many private companiesto have their receivables acknowledged andsettled within 120 days.

Customs duties and VAT are negotiablefor large investment schemes. New VAT-related tax provisions were introduced insummer 2004. Wood processing offers in-teresting investment opportunities follow-ing the adoption of a forestry law. Moreover,Libreville clearly has a competitive edge inthe provision of services on a regional scale,in particular as a regional headquarterslocation for international companies.


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WORLDGabon

SUB-SAHARAN AFRICA

444

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Crude oil 83%■ Manganese 6%■ Wood 6%■ Other 4%

■ Machinery and transport equipment 35%■ Foodstuffs 19%■ Consumer goods 16%■ Chemicals 11%■ Iron and steel 9%■ Fuels 4%■ Other 6%

IMPORTS by products

USA FranceChina Trinidadand

Tobago

Thailand France NetherlandsUSA Cameroon Belgium0

300

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0100200300400500600700800



Indicators Gabon Regional averageEmergingcountry average

GNP per capita (PPP dollars) 5,310 2,029 5,983GNP per capita (USD) 5,000 842 2,313Human Development Index 0.635 0.450 0.672Wealthiest 10% share of national income n/a 34 31Urban population percentage 84 37 44Percentage under 15 years old 40 43 30Number of computers per 1,000 inhabitants 33 18 50

GHANA

445

5

GhanaPopulation (million inhabitants): 22.5GDP (US$ million): 12,906


STRENGTHS• Political stability and an improved

business environment constitute assetsfor foreign investors.

• Ghana’s very successful Eurobond issue,a first for a West African country, was agreat success testifying to investorconfidence.

• The country’s commitment to structuralreforms focused on combating povertyhas received international communitysupport.

• The reduction in debt service resultingfrom debt relief granted under the HIPCand MDRI programmes should provebeneficial to development projects.

• Ghana has been a driving force in theregion playing a particularly active rolewithin New Partnership for Africa’sDevelopment (NEPAD).

WEAKNESSES• An insufficiently diversified economy –

with gold and cocoa generating abouttwo-thirds of exports – has remainedvulnerable to external shocks (such asweather conditions and world prices).

• The inadequacy and dilapidated state oftransport and energy infrastructure hashandicapped various economic sectors.

• Despite substantial progress, the limiteddevelopment of financial intermediationstill hampers the private sector.

• Public and external finances continue toshow structural deficits that keep thecountry dependent on international aid.

RISK ASSESSMENTDespite the drought that affected agricultureand mining, economic growth remainedstrong in 2007 buoyed by high gold and cocoaprices and by the dynamism of the servicesand constructionsectors.Betterprecipitationpatterns should benefit agriculture and in-dustry in 2008 while the holding of theAfrican Nations Cup should spur touristbusiness. Wage increases in the run-up toelections in 2008 should keep inflation at thelevels reached in 2007 stoked by increases infood and electricity prices in the wake of thedrought.

Amid rising social spending a narrow taxbases has handicapped public finances. The

presidential elections in 2008 moreover au-gur a widening fiscal deficit. The currentaccount deficit, exacerbated by growing de-mand for both capital and consumer goods,has, meanwhile, remained large despite thehigh volume of expatriate remittances. Inthat context, bilateral and multilateral debtrelief notwithstanding, the sustainability ofthe foreign debt is all the more uncertainwith the government not excluding a possiblerecourse to non-concessional loans. Coveringinternal and external financing needs willthus continue to depend on grants of inter-national aid in the medium term.

Political stability and the absence of con-flict with neighbouring countries will be

SUB-SAHARAN AFRICA

446

conducive to structural reform implementa-tion. The general elections scheduled forDecember 2008 will mark the end of John A.Kufuor’s second and last term in office

according to the constitution and should thusfoster consolidation of democratic institu-tions.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.2 5.6 5.9 6.0 6.0 6.5Inflation (%) 26.7 12.6 15.1 10.9 10.3 10.0Public sector balance (%GDP)* −9.1 −10.0 −8.2 −12.7 −11.9 −9.5Exports 2,471 2,785 2,803 3,680 3,980 4,623Imports 3,259 4,297 5,345 6,523 7,692 8,652Trade balance −788 −1,512 −2,542 −2,843 −3,712 −4,029Current account balance (%GDP)* −3.5 −8.8 −12.3 −11.2 −11.9 −11.1Foreign debt (%GDP) 99.0 72.7 59.2 22.3 23.6 25.3Debt service (%G& S exports) 14.5 16.2 15.3 11.9 3.9 4.0Foreign exchange reserves (in months ofimports)

3.9 3.9 3.4 3.4 3.2 3.2

* = excluding donations, e = estimate, f = forecast


■ Means of entryThe privatisation programme continues, al-beit slowly. Watermanagementwasawardedto a foreign consortium in June 2006 for aninitial five-year period. Petroleum productdistribution has been liberalisedandgasolineprices reflect the movement in world oilprices. Liberalisation of the electricity indus-try is under review. Moves to sell off amajority stake in Ghana Telecom are underway as the government searches for a stra-tegic investor.

There are no import licences or foreignexchange controls. The country has compre-hensive copyright protection laws. However,these are not always properly enforced.Industrial property is better protected.Trademarks and company logos receiveproper and adequate protection, providedthey have been registered beforehand. Cus-toms duties vary between 0 per cent and 25per cent. Some products from the EconomicCommunity of West African States (ECO-WAS) are exempt from customs duty. Ghanalevies 0.5 per cent duty (Ecowas levy) onproducts from non-ECOWAS countries. Anew 0.5 per cent tax has also been introducedto provision the Export Development Invest-

ment Fund (EDIF). Since 1 April 2000, goodsinspection at the point of entry is carried outby GSBV (a Bureau Veritas/Ghana Stan-dards Board joint venture) and GatewayServices Limited-GSL (a Cotecna/Ghaniancustoms joint venture). GSBV inspects goodsat airports and border crossings, while GSLconducts inspections at the ports of Temaand Takoradi. A 12.5 per cent single-rateVAT is applied to the customs value of goodson top of customs duties and levies. Since 1August 2004, a 2.5 per cent national healthtax applies, like VAT, to all imported goodsand services. Foreign companies face a num-ber of difficulties: a stifling and omnipresentbureaucracy; a legal and judicial systemwhich, while it seems adequate to get the jobdone, nonetheless leaves some room forimprovement (it is both arbitrary and proneto outside interference); and poor financing(the banking sector is not interested inindustrial and business investment). Inorderto cut minting and currency printing costsand reduce the risks associated with trans-porting low denomination bank notes, theGhanian monetary authorities substitutedthe Ghana cedi for the old cedi on 1 July2007. This change in denomination hasinvolved neither a devaluation nor a revalu-ation.

GHANA

447

5

■ Attitude towards foreign investorsTo set up a joint venture with a local partner,the minimum investment is US$10,000. Theequity requirement is five times higher forwholly foreign-ownedcompanies.Purchasing

and sales groups are required to invest aminimum of US$300,000 and employ at least10 local staff. These conditions do not applyto investment and fund management firmsor companies exporting Ghanian products.

SUB-SAHARAN AFRICA

448

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Gold 34%■ Cocoa beans and products 32%■ Wood 8%■ Cotton 6%■ Plastics 5%■ Other 15%

■ Machinery and transport equipment 34%■ Foodstuffs 21%■ Fuels 14%■ Chemicals 14%■ Books and newspapers 4%■ Other 14%

IMPORTS by products

Netherlands USAUK Spain Belgium Nigeria UKChina Belgium USA0

50

100

150

200

250

300

350

0

200

400

600

800

1000

1200



Indicators Ghana Regional averageEmergingcountry average

GNP per capita (PPP dollars) 2,640 2,029 5,983GNP per capita (USD) 520 842 2,313Human Development Index 0.520 0.450 0.672Wealthiest 10% share of national income 30 34 31Urban population percentage 48 37 44Percentage under 15 years old 39 43 30Number of computers per 1,000 inhabitants 5 18 50

GUINEA

449

5

GuineaPopulation (million inhabitants): 9.2GDP (US$ million): 3,317


RISK ASSESSMENTEconomic growth was limited in 2007,marked by the decline of activity outside themining sector after the general labour strikesearly in the year. Despite the upward pricetrend for raw materials, the economy will beunlikely to take off in 2008 with the country’spotential – not only the world’s fourth largestbauxite reserves but also diamonds, gold,iron, hydroelectricity and agriculture – re-maining underdeveloped and its network ofinfrastructure in poor shape. The miningsector, which employs less than 1 per cent ofthe population, has moreover not had muchof a snowball effect on the rest of theeconomy.Galloping inflation has accompanied theeconomic sluggishness, fuelled by an upwardprice trend on foodstuff prices amplified bythe Guinea syli depreciation.

Mining sector resources have facilitatedconsolidation of public sector finances. Exter-nal accounts, meanwhile, have remained indeficit, undermined by imports of food goodsand oil as well as by profit repatriation by

mining companies. Covering financing needshas thus been dependent on internationalaid. Foreign debt relief is moreover pendingagreement with the IMF under the HIPCprogramme. External over-indebtedness re-mains a critical risk in this context.

The political situation continues to beshaky. Having taken power the day after thedeath of the dictator Sekou Toure in 1984,Colonel Lansana Conte set up, from 1991, anational transition government open to civil-ians. The elections of 1993, 1998 and 2003kept him in power. Growing popular dissat-isfaction has, however, resulted in sporadicviolent outbursts, especially in cities. Thedemonstrations of February 2007 led to theappointment of Prime Minister LansanaKouyate, who has put the country on thepath to reform and enlisted the support offinancial backers. The first free and demo-cratic legislative elections could take place in2008 with presidential elections following in2010. Risks of a coup or popular revolttoppling the government are not, however,negligible.

SUB-SAHARAN AFRICA

450


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 1.2 2.7 3.0 2.0 2.5 2.5Inflation (%) 12.9 17.5 31.1 30 35 30Public sector balance (%GDP) −6.1 −4.9 −0.8 1.1 −1.0 −1.0Exports 725 743 850 1,004 1,099 1,150Imports 644 688 723 850 1,000 1,070Trade balance 81 55 127 154 99 80Current account balance (%GDP) −3.4 −5.4 −4.0 −3.6 −4.6 −5.0Foreign debt (%GDP) 95 89 106 111 105 99Debt service (%Exports) 23.4 24.4 20.3 17.2 16.0 13.9Foreign exchange reserves (in months ofimports)

1.4 1.1 0.9 0.9 0.8 0.7


IVORY COAST

451

5

Ivory CoastPopulation (million inhabitants): 18.5GDP (US$ million): 17,484


STRENGTHS• The country’s agricultural and mining

potential is among the highest in WestAfrica.

• The country boasts a developedprocessing industry and goodinfrastructure (transport, financialservices, telecommunications).

• Despite a gridlocked political situation,its membership in Union MonetaireOuest Africaine (UMOA), the West AfricaMonetary Union, constitutes an elementof stability.

WEAKNESSES• The civil war that broke out in March

2002 and the continuing politicalinstability since then have resulted indeteriorated living conditions,dilapidated infrastructure and a bloatedinformal economy.

• This context has generated considerableextra costs for companies and impededan economic recovery.

• The ongoing political crisis hasjeopardised the role of Ivory Coast as aregional economic hub (finance, transit,commercial base) and underminedinvestor interest in the country.

• The business environment remainsmarked by many weaknesses includingsecurity and shipping costs, traffickingand racketeering.

RISK ASSESSMENTThe political situation remains uncertaindespite significant progress that resulted inthe March 2007 Ouagadougou Accords con-cluded between the President LaurentGbagbo and the representative of the NewRebel Forces Guillaume Soros. Based on theaccords, an interim government was set upunder Soros’ leadership. Symbolic acts ofreconciliation (incineration of weapons)raised hopes of real pacification after themany failed attempts at mediation in thepast. The process of disbanding the militiashas stalled, however, and country’s reunifi-cation seems likely to suffer further delays.These uncertainties are associated with thestumbling pace of the process of identifying

the population – a central rebel demand anda prerequisite to holding free and democraticelections by year end as planned. In thiscontext, a resurgence of acts of violenceremains possible.

The economy proved to be relatively resil-ient to the civil war with the country postingpositive growth since 2004 even if it remainswell below the sub-Saharan African averageof 6 per cent. It should nonetheless exceed 3per cent in 2008, driven by the increase ingas and oil production and development ofthe telecommunications sector.

Under execution of budgeted spending hascontributed since 2006 to the emergence of afiscal surplus while firm world gas, oil andcocoa prices have allowed the country to run

SUB-SAHARAN AFRICA

452

a trade surplusand it couldultimatelybenefitfrom partial cancellation of its foreign debtand the resumption of concessional loans.The government has already concluded apost-conflict emergency assistance agree-ment that could lead to agreement on aPoverty Reduction and Growth Facility, theIMF’s special low-interest lending pro-

gramme for poor countries and a prerequisiteto any debt relief granted under the HIPCprogramme. Relations with multilateral fi-nancial backers have been strained,however,due to poor governance. Despite the issuanceof eurobonds to discharge the debt, thecountry has accumulated arrears to publiccreditors.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) −1.6 1.8 1.2 0.9 1.7 3.5Inflation (%) 3.3 1.5 3.9 2.5 2.0 3.0Public sector balance (%GDP)s −5.0 −5.0 −4.3 2.0 2.0 1.5Exports 6,285 7,454 7,263 8,992 8,628 8,561Imports 3,443 4,526 4,920 5,031 4,991 5,092Trade balance 2.842 2.928 2.343 3.961 3.637 3.469Current account balance (%GDP) 1.7 1.5 0.2 3.0 2.3 1.0Foreign debt (%GDP) 94 101 87 105 103 100Debt service (%G&S exports) 28.7 25.3 22.2 18.2 21.6 17.0Foreign exchange reserves (in months ofimports)

2.2 3.1 2.5 2.9 3.0 2.9



■ Means of entrySince 1 January 2000, the date of introduc-tion of the common external tariff, all coun-tries belonging to the West African Economicand Monetary Union (WAEMU) have had anidentical customs regime. Imports frommember states are totally exempt from cus-toms duties, while those from third countriesare liable to four rates of duty: 0, 5, 10 and20 per cent. There is also a statistical tax (1per cent of the CIF value), a communitysolidarity tax (1 per cent), an ECOWAScommunity levy (0.5 per cent of the CIFvalue) and 18 per cent single-rate VAT. Adhoc duties apply to a number of products,including fish, rice, alcoholic beverages, to-bacco, cigarettes and petroleum products. Alimited number of goods are liable to tempo-rary sliding-scale duties that vary between2.5 per cent (lower band) and 5 per cent(upper band). Protectionist measures includean import licence for cotton and 100 per centcotton products (eg wax and bazin), as wellas hydrocarbons. Moreover, sugar imports

are banned by presidential decree sinceAugust 2004.

Products are quality controlled by a stateentity, Codinorm (Cote d’Ivoire Normalisa-tion). Quantity control is carried out prior toshipment by Bivac. Under a decree dated 2April 2002, a certificate of conformity hasbeen required since 2 June 2003 to commer-cialise 80 or so products. As for exchangecontrols, capital flows between the IvoryCoast and non-ECOWAS member states(excluding France)aresubject to theapprovalof the Ministry of Economic Affairs andFinance (Finex Department) for sums equalto or greater than FCFA300,000 (€458).

■ Attitude towards foreign investorsThe current investment act, in force since1995, establishes two regimes: one thatgrants five-year or eight-year tax exemptionsaccording to the size and type of investment;the other an approval system under which in-vestors putting up €762,000 ormore are liableto 5 per cent single-rate import duty on ma-chinery, equipment and the first batch ofspares. The act does not differentiate be-

IVORY COAST

453

5

tween origin of investment and applies toboth local and foreign investment. However,legal insecurity and the socio-political crisisthat has gripped the country since 2002 arecausing concern among business people.

There are no special restrictions on the em-ployment of foreign workers. To hire a for-eigner though, a vacancy must be advertisedfor one month and permission obtained fromthe Ministry of Civil Service and Labour.

SUB-SAHARAN AFRICA

454

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Fuels 37%■ Cocoa 25%■ Vehicles 7%■ Rubber 4%■ Wood 4%■ Chemicals 4%■ Other manufactured goods 11%■ Other 9%

■ Capital goods 35%■ Oil and oil products 30%■ Foodstuffs (including cereals) 17%■ Chemicals 9%■ Other 9%

IMPORTS by products

France USANetherlands Nigeria Germany Nigeria ChinaFrance Venezuela Germany0

300

600

900

1200

1500

0

500

1000

1500

2000



Indicators Ivory Coast Regional averageEmergingcountry average


KENYA

455

5

KenyaPopulation (million inhabitants): 35.1GDP (US$ million): 21,186


STRENGTHS• Kenya’s relatively diversified economy

has benefited from the growth of theconstruction and telecommunicationssectors.

• An emerging middle class hasunderpinned consumption and fosteredgreater diversification of production.

• The regional integration under waywithin the East African Community(EAC) has enhanced Kenya’s role in theregion and its attractiveness to investors.

• The influx of FDI, since 2005 hasunderpinned an increase in medium-term potential.

WEAKNESSES• Agriculture remains a crucial sector of

the economy, generating 25 per cent ofGDP and providing a livelihood for themajority – 85 per cent – of the populationwhose incomes are thus vulnerable toweather conditions.

• A shortage of infrastructure and itsdeteriorated condition have impededgrowth with the road network and portfacilities still inadequate and electricityproduction limited.

• An extensive mobilisation of resourceswill be necessary to stem not only thepoverty that afflicted 46 per cent of thepopulation in 2006 but alsounemployment and an AIDS pandemic insharp decline but still affecting 6 per centof the population.

• Persistent corruption and violence havedamaged Kenya’s image and have had anegative impact on international aid.

RISK ASSESSMENTKenya posted strong growth for the fourthstraight year in 2007. Good weather condi-tions benefited agriculture as well as theforestry and fishing sectors. On a morefundamental level, the base of economicgrowth broadened, thanks to the develop-ment of tourism and the intensification oftrade within the EAC. Those trends shouldcontinue in 2008, provided the post-electionstensions prove to lessen.

The economy has, however, been givingsigns of overheating due to bottlenecks intransport and energy infrastructure. Rising

despite the central bank’s restrictive mone-tary policy, inflation should remain abovethe 5 per cent target.

The good economic conditions coupled withprudent fiscal policy have only contributedmodestly to the consolidation of public fi-nances with privatisation proceeds and taxrevenues less than expected while debt serv-ice and investment spending underminedthebudget. The fiscal deficit should moreovergrow larger in 2008 due to the spendingincrease. The strong growth has moreoverresulted in a widening of the current accountdeficit attributable to rising capital goods

SUB-SAHARAN AFRICA

456

imports and the increasing cost of oil. Thecountry’s external financing needs nonethe-less remain largely covered by incoming FDI.The country has ample and growing foreignexchange reserves.

Despite the progress made in improvingthe business environment, which allowed

Kenya to be included in 2007 among the 10most reform-minded countries in Africa, theanti-corrupt campaign is still inadequate.The escalation of ethnic tensions in the wakeof the hotly disputed December 2007 elec-tions constitutes a critical risk for the stabil-ity of the country and the region.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.8 4.6 5.8 6.1 6.4 6.5Inflation (%) 9.8 11.6 10.3 14.5 6.9 7.2Public sector balance (%GDP)* -3.3 -0.4 0.1 -2.1 -3.9 -5.1Exports 2,412 2,721 3,455 3,502 3,760 4,152Imports 3,569 4,351 5,602 6,768 7,602 8,210Trade balance -1,157 -1,630 -2,147 -3,266 -3,842 -4,058Current account balance (%GDP) -0.2 0.1 -0.8 -2.4 -3.7 -5.1Foreign debt (%GDP) 45.9 42.7 32.3 30.3 30.9 34.6Debt service (%G&S exports) 15.8 7.9 4.4 5.7 5.9 5.1Foreign exchange reserves (in months ofimports)

5.0 4.2 3.9 4.3 4.9 4.8



■ Market overviewKenya is home not only to the headquartersof UN agencies for Africa but also to numer-ous regional head offices of firms operatingin East Africa. Mombasa port and theNorthern Corridor are the gateway to EastAfrica and the great lakes region. Nairobiairport, currently undergoing capacity ex-pansion work, is a tourism and freight hub.Kenya is a member of the EAC and of the 20-country COMESA. This degree of regionalintegration has been achieved through eco-nomic liberalisation of the economy andopenness to investment and imports.

Only some products (firearms, pesticides,animal and plant seed, etc) are banned orrestricted. Protectionist measures restrictforeign ownership of land or investmentmanagement and re-insurance businesses,while slowing the liberalisation of utilities.The EAC common external tariff, in effectsince 1 January 2005, applies rates of 0, 10and 25 per cent according to the degree ofproduct transformation. The standard rateof VAT is 16 per cent. Ad hoc duty is applied

to imported crude oil and refined petroleumproducts.

■ Means of entryThe US dollar, euro and pound sterling arethe most widely used units of account. SinceSeptember 2005, goods exported to Kenyahave been subject to pre-shipment inspec-tion. Interteck and SGS, the two firmsappointed to carry out such inspections,share the world’s countries between them. Inany case, it is advisable to take certainprecautions with regard to payments and usetested procedures such as presentation ofdocuments against payment, guaranteedbank cheques, international transfers andconfirmed letters of credit.

■ Attitude towards foreign investorsThe Kenyan government’s proactive pro-nouncements on foreign investment are notalways borne out in practice. The teethingtroubles faced by the Investment Bill and theKenya Investment Authority, ostensibly re-sponsible for facilitating foreign investmentvia the creation of a one-stop shop, haveengendered an attitude of scepticismtowards

KENYA

457

5

them. In fact, Kenya attracts three times lessforeign investment than either neighbouringTanzania or Uganda. Work permits are hardto come by. Other than de facto or de jurelimitations on access to specific activities(gaming, hunting, etc), there are few restric-tive or discriminatory measures.

In terms of investment safeguards, FDI isgoverned by the Foreign Investment Protec-tion Act 1964, amended in 1988. Other safe-guards derive from Kenya’s membership of:

• MIGA with whom Kenya has negotiateda legal instrument for protecting theinvestments of signatory countriesagainst non-commercial risks;

• CSID which requires that a dispute bebrought before a neutral organisation;

• OPIC (for US investments).

The government has also changed theprocedure for issuing licences and has putgreat efforts into facilitating access to credit.

SUB-SAHARAN AFRICA

458

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Fuels 23%■ Tea 18%■ Horticultural products 14%■ Coffee 4%■ Ores and metals 4%■ Chemicals 4%■ Other manfactured goods 15%■ Other 19%

■ Industrial products 33%■ Fuels 24%■ Transport equipment 20%■ Consumer goods 7%■ Foodstuffs 7%■ Other 10%

IMPORTS by products

Uganda USAUK NetherlandsTanzania UAE ChinaIndia SaudiArabia

USA0

100200300400500600700800

0

200

400

600

800

1000



Indicators Kenya Regional averageEmergingcountry average


LIBERIA

459

5

LiberiaPopulation (million inhabitants): 3.4GDP (US$ million): 631


RISK ASSESSMENTThe political stabilisation and economiccatch-up process has continued. Growth ac-celerated in 2007, driven by public sectorinvestment in agriculture (rubber, palm oiland wood) and in mining (diamonds, iron andgold). The economy should gain additionalstrength with the lifting of the UnitedNations ban on diamond exports (declared inApril 2007) and the development of FDI ininfrastructure projects. The dilapidatedstateof transport infrastructure continues none-theless to hamper an economic activity basedmainly on agriculture. In this context,growthcontributes little to reducing unemployment,which amounts to 40 per cent.

Public finances have been under IMFcontrol since 2006. Public sector accounts arein balance reflecting continued growth of taxrevenues and reductions in fiscal spending.There is a very large external account deficitattributable to the extent of capital goods

imports necessary for the reconstruction. InNovember 2007, Ellen Johnson-Sirleaf’s gov-ernment obtained cancellation of 3.7 billiondollars in debt from multilateral financialinstitutions and the Paris Club. That agree-ment should pave the way for debt reliefunder the HIPC and MDRI programmes incoming years.

Since the end of the civil war in 2003security has been maintained in the countryby a UN peacekeeping force of 15,300 blueberets likely to remain in Liberia until 2011.Reinsertion of former combatants into civil-ian life has been making slow progress withunder-equipped police strugglingtocopewiththe resurgence of violence in Monrovia. Theelection as president in late 2005 of formerWorld Bank Economist Ellen Johnson-Sir-leaf, fully committed to reconstructing Libe-ria and combating corruption, was howeverinstrumental in winning international com-munity support.

SUB-SAHARAN AFRICA

460


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) -31.3 2.6 5.3 7.8 9.4 10.4Inflation (%) 10.3 3.6 6.9 7.2 11.2 9.0Public sector balance (%GDP)* -2.6 1.2 0.6 4.4 -0.1 0.7Exports 109 104 110 158 157 184Imports 128 236 294 401 418 468Trade balance -19 -132 -184 -243 -261 -284Current account balance (%GDP)(*) -16.2 -46.7 -63.5 -68.1 -66.8 -66.1Foreign debt (%GDP) 820 812 690.6 737.3 619.7 558.6Debt service (%G&S exports) 55 54 88.4 63.8 67.6 62.2Foreign exchange reserves (in months ofimports)

0.4 0.6 0.6 1.4 2.2 3.0


LIBERIA

461

5

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Rubber 97%■ Other 3%

■ Oil products 29%■ Foodstuffs 22%■ Machinery and transport equipment 11%■ Manufactured goods 9%■ Other 29%

IMPORTS by products

Germany PolandSouthAfrica

USA Spain SouthKorea

JapanSingapore China Spain0

50

100

150

200

250

300

0

500

1000

1500

2000

2500

3000



Indicators Liberia Regional averageEmergingcountry average

GNP per capita (PPP dollars) n/a 2,029 5,983GNP per capita (USD) 140 842 2,313Human Development Index n/a 0.450 0.672Wealthiest 10% share of national income n/a 34 31Urban population percentage 58 37 44Percentage under 15 years old 47 43 30Number of computers per 1000 inhabitants n/a 18 50

SUB-SAHARAN AFRICA

462

MadagascarPopulation (million inhabitants): 19.1GDP (US$ million): 5,499


RISK ASSESSMENTThe economy grew 6.5 per cent in 2007,driven by public sector investments in energyinfrastructure and mining extraction (ilmen-ite, nickel and cobalt at the Ambatovy Mine).This favourable trend should continue in2008, bolstered by dynamism in the telecom-munications, tourism and financial servicessectors as well as in agriculture, providedthe weather conditions are favourable. Thegrowth has nonetheless not sufficed to signif-icantly reduce the poverty afflicting 70 percent of the population. Despite the cyclonesin March and April last year, the upsurge infoodstuff prices remained limited, thanks tothe firmness of rice production. The CentralBank’s restrictive monetary policy and theappreciation of the ariary, which have kept alid on imported inflation linked to soaring oilprices, should make it possible to keep theincrease in prices under 10 per cent this yearalbeit higher than the 5 per cent inflationtargeted.

There is a structural imbalance in publicsector accounts due to the low level of taxrevenues, which represents – in relation toGDP – barely half the average for sub-Saharan Africa. This shortcoming is indica-

tive of a lack of economic diversification.External accounts, meanwhile, have sufferedfrom the deterioration of the terms of tradewith oil prices rising and revenues fromvanilla and textile exports declining. In thiscontext, the current account balance deteri-orated sharply in 2007 in the wake of theincrease in capital goods imports concomi-tant with the large investments made in themining sector. The current account deficitshould widen further in 2008 despite thedecline in rice imports and the good perform-ance of fish-product exports. In this context,financing needs remain covered by interna-tional aid. In that regard, thanks to theefforts made to speed up structural reforms,the country has enjoyed the backing of theBretton Woods institutions. It thus qualifiedfor substantial debt relief under the HIPCand MDRI programmes.

The party of President Marc Ravaloman-ana, elected in December 2006, won anoverwhelming majority in the September2007 early legislative elections. This victoryshould allow the government to pursue re-forms initiated with international commu-nity backing, particularly those intended tofoster the development of the private sector.

MADAGASCAR

463

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 9.8 5.3 4.6 4.9 6.5 7.3Inflation (%) −1.7 14.0 18.4 10.8 9.8 7.1Public sector balance (%GDP)* −9.3 −13.9 −10.1 −10.5 −10.7 −7.9Exports 941 1,017 857 972 1,034 1,090Imports 1,131 1,472 1,450 1,519 2,037 2,437Trade balance −190 −455 −594 −546 −1,002 −1,347Current account balance (%GDP)* −7.5 −12.9 −12.1 −10.0 −18.2 −21.3Foreign debt (%GDP) 91 80 70 29 27 26Debt service (%exports) 12.3 5.4 8.3 3.5 1.6 1.7Foreign exchange reserves (in months ofimports)

2.6 2.7 2.8 3.0 2.7 2.7


SUB-SAHARAN AFRICA

464

MalawiPopulation (million inhabitants): 13.2GDP (US$ million): 2,232


RISK ASSESSMENTGood weather and higher fertilizer pricesubsidies fuelled a moderate recovery in2007. This trend should continue in 2008with the development of uranium extraction,which has attracted the lion’s share of foreigninvestment. The growth will still not sufficeto significantly reducepoverty.Ranked166thof 177 countries based on its human devel-opment index, Malawi is among the world’spoorest countries. The economy, largely un-derpinned by an agricultural sector, whichemploys 90 per cent of the population, isvulnerable to external shocks.

Despite prudent macroeconomic policy,which resulted in September 2006 in cancel-lation of public foreign debt under the HIPCand MDRI programmes, the fiscal situationis still shaky. The government has beenstruggling to limit public spending and main-

tain economic policy within the limits of theprogramme concluded with the IMF in June2005. The current account, moreover, willdoubtless remain deeply in deficit sincerisingexport revenues supported by the develop-ment of tourism and the recovery of agricul-ture are not proving sufficient to offsetincreasing capital goods imports and a grow-ing oil bill. In this context, financing needsremain largely covered by international aid.

Implementation of reforms undertakenwith international community backing hascome up against stiff resistance from parlia-ment with the priority given by PresidentMutharika to combating corruption evencausing a split in the majority party. In theseconditions the risk of a move to impeach thepresident has been high, and the outcome ofthe next elections, which could be moved upto 2009, remains uncertain.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.9 5.1 5.3 2.3 3.4 5.1Inflation (%) 9.6 11.4 15.5 14 8.4 7.5Public sector balance (%GDP) −17.3 −20.8 −17.6 −19.3 −16.8 −20.4Exports 433 499 505 463 462 480Imports 689 810 1,070 889 836 877Trade balance −256 −311 −565 −426 −374 −398Current account balance (%GDP) −17.2 −21.3 −29.8 −22.2 −18.0 −17.0Foreign debt (%GDP) 178 148 137 20 24 25Debt service (%Exports) 8.9 10.0 7.6 6.3 0.8 0.9Foreign exchange reserves (in months ofimports)

1.5 1.3 1.1 1.4 2.6 3.3


MALI

465

5

MaliPopulation (million inhabitants): 13.9GDP (US$ million): 5,929


RISK ASSESSMENTGrowth slowed in 2007 undermined by asignificant decline in gold and cotton produc-tion resulting from technical failures andpoor weather conditions. Economic activityshould remain dynamic in 2008 underpinnedby public and private investment in the oiland mining sectors and infrastructures.GDPgrowth will nonetheless remain vulnerableto the vagaries of weather and the volatilityof the terms of trade.

The public sector continues to run largedeficits due to the narrowness of the tax base,with spending moreover affected by theincrease in petrol subsidies and the laggingpace of the privatisation programme and ofpension system reform. Capital goods im-ports and the increasing cost of oil continueto undermine the current account even ifrising gold prices have benefited exports invalue terms. In this context, internal andexternal financing needs are still largely

covered by international aid with Mali evensucceeding in building up substantial foreignexchange reserves. As a result of debt reliefunder the HIPC and MDRI programmesmoreover, the debt is now at a sustainablelevel.

Re-elected to second term in April 2007,President Toure won a large parliamentarymajority in July 2007, which should pave theway for continuing the efforts on structuralreforms undertaken. The improved politicaland security situation in Ivory Coast consti-tutes moreover evidence of the regionalstability prerequisite to reopening a tradecorridor to the Port of Abidjan. The armedTuareg Rebellion, althoughconfinedtonorth-ern Mali and not presenting a risk of desta-bilisation at this juncture, has, however,already led to concessions on the compositionof the government with the inclusion ofTuareg ministers and has prompted Presi-dent Toure to promote regional cooperationin combating ‘trans-Saharan criminality’.

SUB-SAHARAN AFRICA

466


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.4 2.2 6.1 5.3 4.1 4.8Inflation (%) −1.3 −3.1 6.4 1.5 2.0 2.5Public sector balance (%GDP)* −5.7 −6.6 −7.3 −7.7 −8.9 −8.6Exports 1,040 1,035 1,071 1,543 1,503 1,694Imports 1,105 1,160 1,213 1,390 1,582 1,760Trade balance −65 −124 −142 153 −79 −66Current account balance (%GDP)* −8.7 −10.3 −10.4 −6.7 −8.1 −7.0Foreign debt (%GDP) 73 49 48 20 23 24Debt service (%exports) 5.8 6.4 7.4 3.7 3.4 3.4Foreign exchange reserves (in months ofimports)

7.3 6.4 6.1 6.1 6.3 6.6

* ex grants, e = estimate, f = forecast

MAURITANIA

467

5

MauritaniaPopulation (million inhabitants): 3.2GDP (US$ million): 2,663


STRENGTHS• Mauritania benefits from extensive

mineral resources (iron, copper, gold anddiamonds) and, since 2006, from oilextraction.

• That potential along withimplementation of a democratic regimeand structural reforms has attractedforeign investment.

• Improved infrastructure has fostereddiversification of the productive fabricbeyond its traditional pillars of iron andfishing.

• The public sector has benefited fromsubstantial foreign debt relief under theHIPC and MDRI programmes.

WEAKNESSES• A sparse population and extensive

poverty afflicting 45 per cent of thepopulation limit the country’s domesticmarket potential.

• The UNDP human development indexranks Mauritania 153rd of 177 countries.

• The ’Dutch Disease’ represents asubstantial risk for manufacturingindustry competitiveness.

• The growing desertification affecting therural economy has been responsible forthe incompressible flow of food imports.

RISK ASSESSMENTEconomic growth was weaker than expectedin 2007 due to a decline in oil production,down 36 per cent, notwithstanding goodperformance in the non-hydrocarbon sector.Infrastructure projects financed by interna-tional aid in 2008 should revive the buildingand public works sector and support thedynamism of telecommunications and com-merce. The additional revenues derived fromoil production and new mining projects havegiven rise to inflationary pressures, whichhave sparked violent demonstrations in sev-eral Mauritanian cities. The government hassince set up the distribution of basic necessi-ties to compensate for the price increases,which should continue in 2008.

With oil revenues still not stabilised, thenarrowness of the tax base continues toundermine the fiscal situation. External

accounts, which have been deep in deficit,should stabilise meanwhile, thanks to theupsurge in crude prices offsetting productionvolatility. In this context, foreign debt hasremained substantial despite relief extendedunder the HIPC and MDRI programmes. Thedebt should, however, be the subject of newbilateral negotiations with financial backersoutside the Paris Club.

President Abdallahi’s victory on 25 March2007 in the first free and democratic electionin the country’s history was followed by thedissolution of the Military Council for Justiceand Democracy, in power since August 2005.The new government team, mainly staffedby technocrats, has intensified the campaignto wipe out the last vestiges of slavery andhas tackled the problem of organising thereturn of 24,000 black Mauritian refugeesfrom Mali and Senegal. This poor and ethni-

SUB-SAHARAN AFRICA

468

cally divided country must now succeed inestablishing concerted management of its oil

revenues and thereby demonstrate its newfound stability.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.6 5.2 5.4 11.4 0.9 4.5Inflation (%) 5.3 10.4 12.1 6.2 7.6 7.3Public sector balance (%GDP)* -16.5 -8.0 -9.2 1.3 -4.8 -6.1Exports 318 440 625 1,367 1,343 1,451Imports 542 923 1,428 1,167 1,199 1,261Trade balance -224 -483 -803 200 144 190Current account balance (%GDP)(*) -20.5 -38.7 -52.7 -4.7 -10.4 -11.6Foreign debt (%GDP) 219 203 169 88 92 87Debt service (%G&S exports) 11.0 8.7 6.3 6.3 6.5 2.7Foreign exchange reserves (in months ofimports)

0.7 0.6 1.1 2.6 1.8 2.8



■ Market overviewThe business climate in Mauritania remainsdifficult. Despite the country’s favourablegeographical situation, abundant mineralresources and free access to European, Amer-ican and Asian markets, the macroeconomicand structural reforms carried out since 1992have failed to improve the investment cli-mate. Manufacturing firms continue to un-derperform (low productivity; high wagecosts).

The funding of, access to and cost of bankloans is seen as the primary obstacle tobusiness growth. Extremely high collateralrequirements add to the difficulties in obtain-ing finance, with only 10 per cent of compa-nies in need of finance resorting to a loan.Labour market regulations are cumbersomeand costly. Corruption is rife. In 2006, forinstance, unofficial payments accounted forsome 6.4 per cent of manufacturing firms’annual sales. Poor infrastructure remains aproblem: power cuts cost manufacturing

firms around 3.3 per cent of annual sales.The burden of taxation is heavy. Aggregatecorporation tax in 2006 was 104.7 per cent.Regulatory restrictions remain in force andthere are doubts about the administration’sability to interpret rules consistently and runthe legal system efficiently.

■ Means of entryThe banking act of March 2007 aims toconsolidate the banking sector. However, theact prohibits local banks from using thecounter sureties of parent companies, whichplaces foreign banks at a disadvantage.Another discriminatory measure wherebyforeign banks would be required to have acapital of MRO6 billion against MRO1 billionfor local ones is due to come into force withintwo to three years. The currency marketcreated in January 2007 works satisfactorily.

The double taxation agreement withFrance, signed in Nouakchott on 15 Novem-ber 1967 (law 68-1174), has not run intoimplementation difficulties of late, except forVAT refunds on services subcontracted inFrance.

MAURITANIA

469

5

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Ores and metals 50%■ Foodstuffs (including fishing products)47%■ Other 3%

■ Oil exploration equipment 45%■ Oil products 16%■ Other manufactured goods 10%■ Chemicals 2%■ Other 27%

IMPORTS by products

China FranceItaly Belgium Spain France USAChina Belgium Italy0

50100150200250300350400

0

50

100

150

200



Indicators Mauritania Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

470

MauritiusPopulation (million inhabitants): 1.3GDP (US$ million): 6,448


STRENGTHS• Among Africa’s most developed

countries, Mauritius has benefited from agood political and institutionalenvironment.

• It has maintained good relations withcountries in the West and on the IndianOcean Rim.

• The economy has been diversifying tohigh value-added sectors, notably financeand new information and communicationtechnologies.

• A well-capitalised and profitable bankingsector has made it possible to supportgrowth while limiting foreign debt.

WEAKNESSES• The sugar and textile sectors that

generate nearly 20 per cent of jobs and40 per cent of exports have suffered fromthe failure to extend preferential tradeagreements.

• The restructuring needed in these twosectors could increase unemploymentand create a possible source of socialunrest.

• The high debt accumulated by the publicsector – 72 per cent of GDP end 2005 —reflects its persistent difficulties.

RISK ASSESSMENTAfter a two-year slump marked by the end ofpreferential agreements in the sugar andtextiles sectors, growth rebounded in 2007,driven by a dynamic tourist sector that hasspurred investment in the building andpublic works sector, financial services andtelecommunications. That trend should con-tinue in 2008 strengthened by restructuringin the textiles, sugar and fishing industries.Improved economic conditions have contrib-uted to strengthening corporate solvency asborne out by the decline in the Cofacepayment incident index.

The economic upturn should facilitate ef-forts to consolidate a government budgetundermined by the poor financial health ofstate-owned companies. The external posi-tion has suffered from the growth of oil

imports in value terms and the decline ofsugar exports since cancellation of the Euro-pean Union’s preferential prices. Rising ex-ports of textiles and fish products inconjunction with GDP growth should pavethe way for a further reduction in the currentaccount deficit in relation to GDP. FDIinflows, meanwhile, have more than coveredthe country’s limited external financingneeds. In this context, the country hasaccumulated ample foreign exchange re-serves.

The government in power since summer2005 enjoys a large majority to undertakethe necessary structural reforms, particu-larly the elimination of price administration.A quality business environment, rankedhighest among sub-Saharan African coun-tries, should facilitate further diversificationof the productive fabric.

MAURITIUS

471

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 2.9 4.2 3.0 3.7 4.7 4.7Inflation (%) 5.1 4.1 5.6 5.1 10.4 6.0Public sector balance (%GDP) -6.2 -5.4 -5.0 -5.3 -4.1 -3.7Exports 1,835 1,935 2,006 2,263 2,365 2,412Imports 2,133 2,309 2,705 3,107 3,441 3,471Trade balance -298 -375 -699 -844 -1,076 -1,059Current account balance (%GDP) 1.7 -3.5 -5.3 -7.4 -4.9 -3.4Foreign debt (%GDP) 15.5 14.5 14.5 14.4 14.5 14.9Debt service (%Exports) 12.9 11.5 10.1 7.5 6.7 6.3Foreign exchange reserves (in months ofimports)

7.6 8.0 5.9 4.5 3.5 4.0



■ Market overviewMauritius has been a full member of theWTO since 1994. It signed the New YorkConvention on International Arbitration in1996, ratifying it in October 2002. Tariffbarriers have been dismantled under a seriesof regional agreements (South African Devel-opment Community, SADC; Common Mar-ket 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 inforce for only a few products. These fall intothree categories: prohibited goods (danger-ous items – firearms and ammunition – aswell as vehicle spare parts); supervisedgoodssubject to government approval (foodstuffs,energy, pharmaceuticals) and unrestricted,formality-free goods.

Tariff barriers. The government intends tomake Mauritius a duty-free island by 2010,starting with the immediate abolition ofcustoms duties for 1,850 tariff lines and cutsin duty on a host of other products. Tariffpeaks of 65, 55 and 40 per cent have all beenlowered to 30 per cent, including thoseapplicable to alcoholic beverages and ciga-rettes, where the cuts have been offset by anincrease in excise duties. The number of non-zero-rated tariff bands has been reducedfrom seven to three at 10, 15 and 30 per cent.

Excise duties are levied on four groups ofimported and/or locally manufactured goods(alcoholic beverages, cigarettes, petrol andmotor vehicles). Some products (food staplesand pharmaceuticals) and services (educa-tion, transport, electricity and water) areexempt from VAT.

Non-tariff barriers. Import licences andprice controls apply to staples, 30 of whichare also subject to administered pricing orprofit control. Dairy products and pharma-ceuticals have recently been added to thislist.

State monopolies. Some so-called ’strategic’products may only be imported by state-owned enterprises. The key ones are theState Trading Corporation (STC), whichimports almost all the rice ration, somewheat flour, petroleum products and cement(up to 25 per cent of requirements); and theAgricultural Marketing Board (AMB), whichholds an import monopoly on onions, garlic,potato seeds, saffron and cardamoms. How-ever, since early 1998 the AMB has relin-quished some of its monopoly powers andpermits potatoes to be imported free fromprice controls by approved private agentssubject to certain conditions.

■ Attitude towards foreign investorsMauritius has a highly pro-active policy ofattracting foreign investment. The Board ofInvestment (BOI) is a one-stop shop inchargeof this policy. The Board has an office in

SUB-SAHARAN AFRICA

472

Paris. It is possible for SMEs to start up inthree days. The government checks compli-ance with rules and procedures ex post.Procedures are in place to facilitate foreigninvestment activity as well as the acquisitionof property by foreigners. Numerous meas-ures have been taken to promote recruitmentof foreign experts by Mauritian firms. On theother hand, all ad hoc investment incentivesgranted until now have been abolished,except for two schemes: free port and inte-grated resort. Free zone status has beenabolished as well and replaced by a VAT,

corporation tax and income tax regime appli-cable to all companies and persons at a singlerate of 15 per cent.

■ Foreign exchange regulationsThe rate of exchange of the Mauritian rupeeis set by the central bank against a basket ofcurrencies. There are no longer any exchangecontrols in Mauritius. The Mauritian rupeeis fully convertible against the main curren-cies and may be transferred without restric-tion upon the sender providing proof of originof funds.


0

50

100

150

200

250

300

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDMauritius

MAURITIUS

473

5

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Manufactured goods (textiles excluded) 39%■ Textiles and clothing 32%■ Sugar 15%■ Fishing products 7%■ Other 7%

■ Machinery and transport equipment 31%■ Other manufactured goods 25%■ Fuels 17%■ Foodstuffs 16%■ Other 11%

IMPORTS by products

UK UAEFrance USA Madagascar France IndiaSouthAfrica

China Bahrain0

100200300400500600700800

0

100

200

300

400

500

600



Indicators Mauritius Regional averageEmergingcountry average

GNP per capita (PPP dollars) 13,510 2,029 5,983GNP per capita (USD) 5,450 842 2,313Human Development Index 0.791 0.450 0.672Wealthiest 10% share of national income n/a 34 31Urban population percentage 42 37 44Percentage under 15 years old 25 43 30Number of computers per 1,000 inhabitants 162 18 50

SUB-SAHARAN AFRICA

474

MozambiquePopulation (million inhabitants): 20.1GDP (US$ million): 7,608

Country @rating: BMedium-term rating: High riskBusiness climate rating: D

STRENGTHS• Mozambique is endowed with abundant

natural resources (agriculture, ore,hydroelectricity, tourist potential) andbenefits from a favourable geographicsituation, with proximity to South Africaand a long coastline.

• Tension-free relations with neighbouringcountries, its political stability andimplementation of structural reformshave made Mozambique attractive toinvestors.

• In the post-HIPC and MDRI context, theIMF has classified Mozambique in the’green light’ group of countriescharacterised by sustainable debt levels.

• Construction of a bridge over theZambezi River should release thecountry’s northern region from itslandlocked condition.

WEAKNESSES• Economic growth is still too dependent

on megaprojects with the benefits notspreading readily to the rest of theeconomy, particularly in terms of jobsand reduction of the poverty afflicting 54per cent of the population.

• Agriculture still employs 80 per cent ofthe population whose livelihood thusremains vulnerable to weatherconditions.

• With infrastructure underdeveloped(energy delivery, transport), markedregional disparities have persisted.

• Difficult access to financing and adeficient institutional framework havehampered development of the nationalprivate sector.

• Covering internal and external financingneeds continues to depend oninternational aid.

RISK ASSESSMENTMozambique has enjoyed strong growthdriven mainly by investment in megaprojects(hydroelectricity, ore mining, natural gas)but also by continued farm-sector develop-ment (cotton, tobacco, sugar). The CentralBank’s tight monetary policy should moreo-ver facilitate keeping inflation under the 10per cent threshold in 2008 despite the highoil prices and rising foodstuff prices.

Mozambique is nonetheless still very de-pendent on international aid. Facing a largefiscal deficit, excluding grants, the govern-ment has struggled to broaden the tax basewith spending on education and health in-

creasing and the dynamism of the megapro-jects not spreading sufficiently to the rest ofthe economy. Similarly, imports of capitalgoods and rising oil prices should continue towiden the current account deficit. FDI andthe influx of aid have nonetheless largelycovered financing needs with the countryeven accumulating respectable foreignexchange reserves. Debt relief under theHIPC and MDRI programmes moreoverpaved the way for substantial reductions inthe country’s debt ratios. In this context,there will be little risk of sovereign defaultor unsustainable foreign debt.

MOZAMBIQUE

475

5

Politically, the de facto resurgence of a one-party system does not seem to be a source ofconcern for foreign investors at this juncture.They seem confident in the government’s

capacity to initiate a new wave of reformsfocused on improving the business climateand modernising the financial sector and thelegal system.


USD millions 2003 2004 2005 2006(e) 2007(f) 2008(f)

Economic growth (%) 7.8 7.5 6.2 8.5 7.0 7.0Inflation (%) 13.4 9.1 11.2 9.4 6.0 5.7Public sector balance (%GDP)* -15.5 -12.1 -8.6 -14.4 -15.9 -14.0Exports 1,044 1,504 1,745 2,391 2,580 2,542Imports 1,741 2,035 2,467 2,878 3,119 3,275Trade balance -697 -531 -722 -487 -539 -733Current account balance (%GDP)(*) -19.9 -14.1 -15.8 -13.6 -17.9 -17.0Foreign debt (%GDP) 112 96 91 41 44 44Debt service (%Exports) 24.8 23.9 19.1 13.7 14.8 16.4Foreign exchange reserves (in months ofimports)

4.8 5.8 4.6 4.4 4.2 4.2



■ Market overviewCustoms duties currently range from 0 percent for pharmaceuticals, 2.5 for commodi-ties, 5 for capital goods to 7.5 for semi-finished goods and 20 per cent for luxury andsimilar products. Different rates of duty mayapply to one and the same product category(eg vegetables and private vehicles). Dutieson passenger cars, for instance, vary between5 and 20 per cent. According to foreigncompanies based in Mozambique, the exis-tence of a thriving parallel economy notsubject to import duties and levies or VAT(17 per cent) hampers fair competition andthe export of their products. Customs proce-dures are so long-winded and complex that itis essential to hire the services of a specialMozambican agent (despachante), inadditionto a shipping agent. For payments notconnected with loans granted by interna-tional lenders, it is advisable to use theirrevocable and confirmed documentary let-ter of credit. Foreign capital may be repatri-ated, subject to the approval of the CentralBank and Ministry of Finance, only if theinvestment project has been authorised be-forehand by the Investment Promotion Cen-tre (CPI). Pre-shipment inspection is carried

out by Intertek Testing Services (ITS) of theUnited Kingdom. A non-intrusive but expen-sive system for scanning container goods isin place since May 2006 and operated underconcession by a local company.

■ Attitude towards foreign investorsThe CPI was set up to facilitate and coordi-nate the decision-making process for directinvestments. While there is no legal require-ment to consult this body, foreign investorsare strongly advised to do so. Thegovernmentguarantees legal certainty and protection ofproperty and other rights. A tax benefits lawand industrial free zone legislation offermany FDI incentives. The country’s legisla-tion provides for the establishment of whollyforeign-owned businesses, but joint ventureswith local partners are encouraged by thegovernment. Living conditions for expatri-ates in the capital and major towns arehighly satisfactory, but hygiene remains aproblem in some regions.

■ Foreign exchange regulationsAn inter-bank currency market to regulatepurchases and sales of foreign currency is inplace. It is only open to the central bank andapproved financial institutions. The value ofthe metical is determined daily on the basis

SUB-SAHARAN AFRICA

476

of supply and demand. Foreigners arestrongly advised to carry out all foreignexchange transactions via approved banksand bureaux de change. Banks can carry out

currency transactions up to the value of theirhard currency holdings. There are no restric-tions on capital transfers.

MOZAMBIQUE

477

5

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Aluminium 59%■ Fuels 15%■ Electricity 8%■ Tobacco 5%■ Fishing products 4%■ Sugar 4%■ Other 6%

■ Mega-projects 23%■ Foodstuffs 14%■ Oil products 12%■ Capital goods 11%■ Cars 6%■ Chemicals 6%■ Other manufactured goods 17%■ Other 10%

IMPORTS by products

Belgium SpainItaly China Zimbabwe SouthAfrica

ChinaAustralia India Portugal0

100

200

300

400

500

600

0

200

400

600

800

1000

1200



Indicators Mozambique Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

478

NamibiaPopulation (million inhabitants): 2.1GDP (US$ million): 6,372


RISK ASSESSMENTIn 2008 as in 2007, the mining sector willdrive GDP growth, particularly with dia-mond and uranium production higher andtheir world prices trending up. Zinc refiningand copper processing should also contributeto the good performance of the manufactur-ing sector while offsetting the disappointingperformance of agriculture and fishing. Infla-tion, meanwhile, after a spike in the first halfof last year attributable to a poor agriculturalharvest and high oil prices, should ease tounder 5 per cent in 2008 amid restrictivemonetary policy.

Although the depreciation of the Namibiancurrency – pegged to the South African rand– contributed to the inflation, it also en-hanced the competitiveness of Namibianproduction and spurred the increase in tour-ist revenues. External accounts thus re-mained in good shape even with the currentaccount surplus likely to shrink in 2008 dueto the increase in capitalgoods imports linkedto development of the Kudu gas complex andto the continuing high oil prices. Foreignexchange reserves, undermined by net capi-

tal outflows, remain insufficient in thatregard, even with foreign debt remainingmodest. Increased development spending in2008 and a planned cut in the redistributionof customs duties by the SACU customsunion could moreover jeopardise efforts toconsolidate public sector finances.

Faced with unrelenting social challenges,the government has undertaken to acceleratethe pace of reforms, particularly on propertyrights and those focused on BEE, or BlackEconomic Empowerment, the devolution ofeconomic power to the black population.Following the South African model, investorswill have to set up partnerships with BEEcompanies and implement programmes tocombat AIDS. They will continue, however,to benefit from tax breaks – albeit currentlyunder revision – as well as a hospitablebusiness environment, enhanced by the Na-mibia’s creditworthiness. The country’spolit-ical stability should moreover not be injeopardy notwithstanding the leadership cri-sis currently buffeting the party in power,South West Africa People’s Organisation(SWAPO).

NAMIBIA

479

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.5 6.6 4.2 4.6 4.8 5.0Inflation (%) 7.2 4.1 2.3 5.1 6.6 4.9Public sector balance (%GDP) -7.5 -3.4 -0.7 0.1 -0.8 -3.6Exports 1,251 1,823 2,067 2,420 2,567 2,624Imports 1,711 2,107 2,332 2,559 2,783 2,977Trade balance -460 -284 -265 -139 -216 -354Current account balance (%GDP) 5.1 9.0 7.2 13.9 13.0 8.4Foreign debt (%GDP) 23.0 21.2 20.9 20.8 20.0 19.6Debt service (%Exports) 2.7 2.4 3.0 2.7 2.8 2.8Foreign exchange reserves (in months ofimports)

2.1 1.8 1.5 1.7 1.8 1.8


SUB-SAHARAN AFRICA

480

NigerPopulation (million inhabitants): 14.4GDP (US$ million): 3,544


RISK ASSESSMENTEconomic growth remained strong in 2007and that trend should continue in 2008,driven by investments in the mining sector(uranium, gold and coal), telecommunica-tions and transport infrastructure. Thatoutlook will be subject to downward revision,however, in case of severe weather distur-bances. Still based on a farm sector thatemploys 80 per cent of the working popula-tion, the economy of this landlocked country,among the world’s poorest, remains vulner-able to exogenous shocks.

Public sector finances have suffered fromthe narrowness of the tax base and the extentof the informal sector. The public deficitincreased in 2007 with implementation ofmajor investment projects – involving irri-gation, the building of slaughterhouses andcreation of an agricultural bank – intendedto secure the food supply. And reduction of

the deficit will be unlikely in 2008 despiteefforts made to improve resource mobilisa-tion. External accounts also continue to showlarge imbalances notwithstanding the betterterms of trade benefiting uranium exports.In fact, the sharp increase in capital goodsimports needed to implement the investmentprogrammes is undermining the trade bal-ance. In this context, even with the signifi-cant improvement in debt ratios achieved,thanks to the HIPC and MDRI programmes,the debt is still not sustainable.

The country thus continues to depend onsupport from international financialbackers.And despite the lagging pace of structuralreforms and the resurgence of political ten-sions in the run-up to presidential electionsin 2009 that backing should not be injeopardy. Niger is indeed pivotal to regionalstability, particularly in maintaining secu-rity in the Sahel in the framework of thecampaign against international terrorism.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.5 -0.8 7.4 5.2 5.6 5.4Inflation (%) -1.8 0.4 7.8 0.1 0 2Public sector balance (%GDP)* -7.5 -10.5 -10.1 -6.5 -12.5 -11.7Exports 335 445 478 521 619 680Imports 469 599 770 783 1,022 1,172Trade balance -134 -153 -291 -262 -403 -493Current account balance (%GDP)(*) -10.1 -10.2 -12.0 -10.7 -14.2 -17.4Foreign debt (%GDP) 75.8 67.8 59.2 22.7 25.0 27.3Debt service (%G&S exports) 27.2 16.3 11.8 4.4 3.7 3.5Foreign exchange reserves (in months of imports) 4.7 3.9 3.1 4.6 4.5 4.7


NIGERIA

481

5

NigeriaPopulation (million inhabitants): 144.7GDP (US$ million): 114,686

Country @rating: DMedium-term rating: High riskBusiness climate rating: D

STRENGTHS• Nigeria boasts extensive hydrocarbon

resources and great agriculturalpotential.

• Structural reforms undertaken in 2003and which resulted in debt relief grantedby the Paris Club will provide a solidfoundation for future economic and socialdevelopment.

• Representing half of West Africa inpopulation terms, Nigeria has played amajor political role at both the regionaland continental levels.

WEAKNESSES• Social, ethnic and religious tensions have

constituted a major deterrent toinvestors faced with an unfavourablebusiness environment.

• The economy continues to depend on oil,which has represented nearly 90 per centof exportations, about 25 per cent of GDPand over 80 per cent of tax revenues.

• Deficient transport and energy-deliveryinfrastructure has impeded efforts todiversify the productive fabric.

• The oil resources have only partiallybenefited the population, with thepoverty rate remaining very high (70 percent live on under a dollar a day).

RISK ASSESSMENTLike in 2006, oil production in 2007 was re-duced to 60 per cent of capacity due to persist-ent tensions in the Niger Delta. Growthnonetheless exceeded 4 per cent, driven by avery dynamic agricultural sector and a grow-ing services sector. The growth rate couldclimb to 8 per cent in 2008, thanks to the pro-duction start-up of off-shore oil sites and de-velopment of the gas sector. The centralbank’s restrictive monetary policy and a goodharvest season should moreover make it pos-sible to keep inflation to one digit in 2008.

That favourable context, in conjunctionwith tight fiscal policy, has allowed Nigeriato run a public sector financial surplus andenjoy an excellent external situation. Theagreement reached in October 2005 with theParis Club has moreover resulted in thevirtual elimination of foreign debt and made

public sector debt sustainable in the mediumterm. Nonetheless, the public sector andcurrent account balances, excluding hydro-carbon revenues, have been showing worry-ing deficits, respectively, a negative 45 percent and a negative 36 per cent of GDP in2007, indicative of an insufficiently diversi-fied economic fabric.

Political and institutional weaknesses con-tinue to be a substantial risk factor. Comingto power in May 2007 after disputed elec-tions, Umaru Yar’Adua may, despite theformation of a national unity government,experience difficulties in pacifying the NigerDelta region and in carrying on with eco-nomic reforms initiated by the previousadministration (privatisations, oil fund). Inthat context, the anti-corruption campaignto which the government gives priority couldlose momentum and the business climateremain a source of concern.

SUB-SAHARAN AFRICA

482


USD billions 2003 2004 2005 2006e 2007(e) 2008(f)

Economic growth (%) 10.7 6.1 7.2 5.6 4.2 8Inflation (%) 14 15 17.9 8.3 5.3 7.4Public sector balance (%GDP) 0 7.7 10.7 8.4 0.3 4.4Exports 27.3 37.3 53.1 62.5 60.4 65.3Imports 17.2 19.4 25.4 30.9 38.9 41.0Trade balance 10.1 17.9 27.7 31.6 21.5 24.3Current account balance (%GDP) -3.6 5.3 9.3 12.2 0.2 2.4Foreign debt (%GDP) 58.2 50.2 20.8 3 2.6 2.4Debt service (%Exports) 9.7 7.8 6.4 7.9 1.7 0.9Foreign exchange reserves (in months ofimports)

2.5 6.0 8.4 10.2 11 12.7



■ Market overviewThe country is a member of the WTO, butdoes not fully observe its rules. While theapplication of the ECOWAS common exter-nal tariff (more or less the same asWAEMU’s) has recently led to a reduction inthe average rate of customs duty (theoreti-cally capped at 20 per cent), a substantialnumbers of products continue to receivetemporary additional protection via 50 percent tariffs. Moreover, an import ban is inplace for 40 or so products, including re-treaded tyres, second-hand clothes, cars overeight years old, furniture, some textiles,frozen meat, mineral water, pasta and bis-cuits. To favour local products, the Nigeriangovernment has increased the number ofprotectionist measures against finishedgoods but cut customs duties on raw materi-als, intermediate products and machinery. Ithas also announced the lifting of import bansover the next few yearsandtheirreplacementwith additional protective tariffs.

The privatisation of port services hasspectacularly speeded up customs clearance.The country recently switched from pre-shipment inspection to inspection upon arri-val. The problems associated withdistribution should not be underestimated.Given the country’s size and poor infrastruc-ture, it may be necessary to use the servicesof a well-established distribution networkwhen starting a business.

■ Attitude towards foreign investorsThe Nigerian Investment Promotion Com-mission (NIPC), headquartered in Abuja,regularly publishes a list of priority in-vestment sectors and the various subsidies(financial, tax, etc) granted to companiesby the government. It provides a wide rangeof services for investors and has set up aone-stop investment centre (OSIC) to speedup incorporation formalities for Nigerian-law companies. Foreign investors may holda 100 per cent stake in a local company.The repatriation of capital, dividends andprofit is unrestricted, though extremelyslow.

Labour is fairly cheap. A semiskilledworker earns about €150 a month, while anEnglish-speaking local secretary gets around€250. Employees usually receive one month’sextra pay.

■ Foreign exchange regulationsThe Central Bank of Nigeria (CBN) useswholesale Dutch auctions to supply the localmarket with currency. Under this system,twice a week the CBN announces the volumeof currency (dollars) it is prepared to sellagainst nairas and invites banks to put inpurchase bids, serving those offering thehighest rate first within theamountof foreigncurrency available. Since spring 2006, mon-eychangers too have direct access to thecentral bank. As a result, the traditionalspread between the official exchange rate

NIGERIA

483

5

and the parallel market rate has been all buteliminated. The naira’s exchange rateagainst both the dollar and the euro has alsosteadied. However, the CBN’s decision toproceed with the naira’s redenomination insummer 2007, accompanied by greater con-

vertibility of the Nigerian currency, wasblocked by the President.

Exporters are strongly advised to obtainpayment for all orders before shipment,either by irrevocable and confirmed letter ofcredit or in cash in a hard currency.

SUB-SAHARAN AFRICA

484

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Oil 82%■ Gas 9%■ Machinery and transport equipment 2%■ Other 7%

■ Manufactured goods 29%■ Machinery and transport equipment 21%■ Chemicals 20%■ Fuels 16%■ Foodstuffs 6%■ Other 9%

IMPORTS by products

USA BrazilSpain France Germany China NetherlandsUSA UK France0

500

1000

1500

2000

2500

3000

3500

0

5000

10000

15000

20000

25000

30000



Indicators Nigeria Regional averageEmergingcountry average


RWANDA

485

5

RwandaPopulation (million inhabitants): 9.2GDP (US$ million): 2,494


RISK ASSESSMENTThe mining, servicesandconstructionsectorsdrove growth in 2007 which should continueat 4.6 per cent this year, far below the 7.0per cent objective set by the government.Agriculture which represents 40 per cent ofGDP and employs 90 per cent of the popula-tion has suffered from low productivity andremains very vulnerable to weather condi-tions. A manufacturing sector (beveragesand tobacco) still hampered by defectivetransport and energy infrastructure has tocontend with increased regional competition:Rwanda joined the regional East AfricanCommunity market in June 2007.

Persistent public sector financial imbal-ances are attributable to the narrowness ofthe tax base in conjunction with increases inpriority spending on education and infra-structure (roads and river transport). Exter-nal accounts also show large deficits with thegood performance of ore, coffee and teaexports not sufficing to offset rising capital

goods imports and a soaring oil bill. Andtransport costs resulting from Rwanda’slandlocked position continue to underminethe services balance despite the developmentof tourism. In this context, covering internaland external financing needs still largelydepends on international aid. In 2006, thisaid resulted in substantial foreign debt reliefunder the HIPC and MDRI programmes.

The national reconciliation process hascontinued and two milestones will mark2008: the International Criminal Court forRwanda will hear its last trial and so-calledGacaca jurisdictions dedicated to the 1994genocide will be dissolved. In the absence ofpolitical opposition, President Kagameshould continue to dominate domestic poli-tics. Regional tensions have heightenedmeanwhile with Uganda and the DemocraticRepublic of Congo accusing Rwanda of back-ing an armed rebellion particularly in themajority Tutsi province of North Kivu in theCongo.

SUB-SAHARAN AFRICA

486


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 0.9 4.0 6.0 5.3 4.5 4.6Inflation (%) 7.4 12 9.2 8.8 8.2 7.5Public sector balance (%GDP)* -10.3 -12.1 -13.4 -12.7 -15.4 -16.5Exports 63 98 125 142 153 166Imports 244 276 374 438 570 577Trade balance -181 -178 -249 -295 -417 -411Current account balance (%GDP)* -19.2 -18.2 -19.4 -17.6 -20.6 -18.4Foreign debt (%GDP) 93 92 71 15 15 16Debt service (%G&S exports) 11.1 9.6 7.2 3.5 1.5 1.3Foreign exchange reserves (in months of imports) 5.0 6.3 6.2 5.5 5.1 5.2


SAO TOME AND PRINCIPE

487

5

Sao Tome andPrincipePopulation (inhabitants): 160,055GDP (US$ million): 123


RISK ASSESSMENTStrong growth continued in 2007. The econ-omy has benefited from the dynamism of theservices sector associated withoil explorationand a buoyant building and public workssector spurred by the development of tour-ism. The influx of foreign investment inservices and building and public worksshould continue in 2008 and growth shouldremain at about 6 per cent. High inflationhas accompanied the good economic condi-tions with the dobra depreciation compound-ing the imported inflation associated withthe higher oil and foodstuff prices.Restrictivemonetary policy should nonetheless make itpossible to slow inflation below the 12 percent threshold set by the central bank.

Public sector finances continue to sufferfrom large imbalances. The tax system over-

haul and the increase in tax revenues havehowever resulted in a reduction in the deficitin 2007, a trend likely to continue in 2008.External accounts are also in deficit, thetrade balance suffering from rising importsnot only of oil but of capital goods necessaryfor oil exploration with the upward trend ofcocoa exports not sufficing to offset the importgrowth. In this context, financing needsremain high but nonetheless largely coveredby the growth of FDI. The country moreoverbenefited last year from substantial relief ofdebt that had become unsustainable.

Improvement in the country’s politicalstability has been gradual. President Fra-dique de Menezes still does not benefit fromenough support in parliament to implementthe reforms demanded by financial backers,especially those intended to improve thebusiness environment.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.0 3.8 5.4 7.0 6.0 6.0Inflation (%) 9.6 12.8 16.3 23.1 16.6 11.4Public sector balance (%GDP)* -49.5 -58.8 -38.3 -28.8 -20.7 -19Exports 6.6 3.6 3.4 3.8 4.5 4.8Imports 34 36 42 71 71 77Trade balance -27 -32 -38 -67 -67 -72Current account balance (%GDP)* -56.7 -58.8 -39.4 -65.0 -55.9 -55.0Foreign debt (%GDP) 492 468 310 260 53 54Debt service (%G&S exports) 49.5 45.3 48.1 24.6 4.7 5.1Foreign exchange reserves (in months of imports) 4.9 3.6 4.7 3.8 3.6 3.5


SUB-SAHARAN AFRICA

488

SenegalPopulation (million inhabitants): 11.9GDP (US$ million): 8,936


STRENGTHS• The country has benefited from relative

political stability.• The international community marked its

support for Senegal’s efforts onstructural reforms via debt reliefextended under the HIPC and MDRIprogrammes.

• The reforms – infrastructure, taxes,health, education – have improved thebusiness climate.

• Senegal’s membership in the WestAfrican Economic and Monetary Unionconstitutes a guarantee of monetarystability.

WEAKNESSES• With efforts to diversify the productive

fabric hobbled by transport and energyinfrastructure development, the economycontinues to depend heavily onagriculture, which is the livelihood of 60per cent of the working population activeand represents 15 per cent of GDP.

• Poverty – which afflicts 57 per cent of thepopulation – and regional disparitiesconstitute major weaknesses.

• Senegal’s industrial developmentdepends on the major restructuringchallenge facing state-owned and semi-private companies.

• With public and external accountsundermined by structural imbalances,the country remains dependent onexpatriate remittances and internationalcommunity aid to cover its financingneeds.

RISK ASSESSMENTGDP growth rebounded in 2007, buoyed by abetter harvest season and an increase inphosphate production following the recapi-talisation of Senegal Chemical Industries. Itshould remain strong in 2008, driven by serv-ices, particularly telecommunications, and abuilding and public works sector benefitingfrom major infrastructure projects. The econ-omy continues, however, to be vulnerable toweather shocks, which affect not only farmproduction but also the supply of energy, andthereby the entire productive fabric.

Despite a broadening of the tax base andan increase in taxes, public sector accounts

are still in deficit due to increases in invest-ment spending and subsidies of electricityconsumption. External accounts are alsodeeply in deficit due not only to rising energycosts but also to a loss of competitiveness bybestselling export products (phosphates, fer-tiliser) and a decline in fishing resources. Asa result of the debt relief granted under theHIPC and MDRI programmes, however, thedebt ratios are now sustainable and the debtservice very low.

After some 10 years of real political stabil-ity, Senegal’s political climate deterioratedin the wake of the contested outcome of theFebruary 2007 presidential elections. Abdu-

SENEGAL

489

5

laye Wade’s re-election for a third termprompted the opposition parties to boycottthe June 2007 legislative elections and forthe first time since 1978 the Assemblyconvenes without the main opposition forces.The large majority won by the SenegaleseDemocratic Party in both the Assembly andSenate should enable the government to

pursue the reforms supportedbythefinancialbackers. The emergence of the new presidentof the senate, Pape Diop, as a major politicalfigure augurs well for a smooth politicaltransition with the 81-year-old incumbentAbdulaye Wade’s term in office scheduled toend in 2012.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 6.5 6.2 5.5 3.5 4.5 4.8Inflation (%) 0 0.5 1.8 1.9 1.7 2.5Public sector balance (%GDP)* -4 -6 -5.3 -5.8 -5.4 -5.4Exports 1,411 1,486 1,603 1,861 1,898 2,038Imports 2,319 2,507 2,729 3,174 3,206 3,402Trade balance -907 -1,022 -1,126 -1,313 -1,307 -1,364Current account balance (%GDP)* -8.6 -8.7 -9.2 -13.3 -11.3 -10.0Foreign debt (%GDP) 64.1 53.2 44.3 30 13.1 12.2Debt service (%G&S exports) 10.5 6.6 5.9 2.1 2.1 2.0Foreign exchange reserves (in months ofimports)

4.1 4.4 4.4 4.3 4.4 4.3



■ Means of entryThe customs union established by the mem-ber states of the West African Economic andMonetary Union (WAEMU) is simple and itsterms fairly advantageous. Some goods aresubject to special import formalities, but onlyproducts likely to ‘upset public order’ or‘contravene good morals’ are banned. How-ever, since October 2005 there is an embargoon poultry meat and eggs. It is also forbiddento import second-hand poultry equipment.

At the same time, a market regulationagency (ARM) has been set up with powersto temporarily suspend imports of some farmproducts in order to promote local produce.

■ Attitude towards foreign investorsSenegal has very liberal laws. Foreignersenjoy total freedom of establishment andmay set up wholly foreign-owned companiesin the country. Only the fish trade, transportand the bakery business are reserved forlocals. Acquiring title or a hereditary lease

in connection with a business, though, canbe cumbersome, long and complex.

A number of entities have been set up toassist investors. These include the nationalagency for investment promotion and large-scale project development (APIX, Agencenationale chargee de la promotion des inves-tissements et des grands travaux) and theSME development and support agency(ADPME, Agence de Developpement desPetites et Moyennes). APIX, which plays aleading role in the investment assistanceprocess, opened a dedicated company start-up office (BCE, Bureau d’appui a la creationd’entreprise) on 19 July 2007. The BCEenables all company incorporation formali-ties to be completed within 48 hours. Thesearrangements consolidate the investmentcode, the concessions act and the communityregulatory framework (OHBLA, WAEMU,SYSCOA).

A new government procurement law(CMP,Coastal Management Programme) wasadopted in 2007 but has not yet come intoforce. New legislation on SME development

SUB-SAHARAN AFRICA

490

and promotion is in the process of beingadopted with regard to taxation, law no.2006-17 has cut corporation tax to 25 percent. Equalisation tax was abolished in 2007.

■ Foreign exchange regulationsFunds may be transferred freely from Sene-gal, as from all WAEMU member countries,through approved intermediaries or the postoffice (for amounts equal to or belowFCFA1,000,000), subject to submission ofproof and of a currency approval form to the

intermediary concerned. In general, foreignpayments for the delivery of goods areauthorised, including payment of fees in-curred in connection with port services,warehousing, storage, customs inspectionand clearance, as well as any fees andexpenses related to goods transport, insur-ance, reinsurance, etc. Administrative for-malities can be slow and transfers lengthy.Relations between the BCEAO and localbanks tend to be fairly tense.


0

50

100

150

200

250

300

350

400

June 9

7

Dec-9

7

June 9

8

Dec-9

8

June 9

9

Dec-9

9

June 0

0

Dec-0

0

June 0

1

Dec-0

1

June 0

2

Dec-0

2

June 0

3

Dec-0

3

June 0

4

Dec-0

4

June 0

5

Dec-0

5

June-0

6

Dec-0

6

June-0

7

Dec-0

7

WORLDSenegal

SENEGAL

491

5

OPPORTUNITY SCOPE



Mn USDMn USD


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%

■ Fuels 26%■ Foodstuffs 23%■ Electrical machinery and equipment 16%■ Chemicals 9%■ Vehicles 6%■ Other manufactured goods 19%

IMPORTS by products

Mali ItalyFranceIndia The Gambia France ChinaNigeria NetherlandsUK0

50

100

150

200

250

300

350

0

200

400

600

800

1000



Indicators Senegal Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

492

Sierra LeonePopulation (million inhabitants): 5.6GDP (US$ million): 1,443


RISK ASSESSMENTEconomic growth remained strong in 2007,driven by diamond, rutile and bauxite exploi-tation. The strong growth should continuethis year, underpinnedby private investmentin ore exploitation and public investment inrehabilitating transport and energy infra-structure devastated by 10 years of civil war(1992–2002). While the reconstruction phasecontinues, the economy should also benefitfrom the development of services and theincrease in farm production. The growth rateis still not high enough, however, to enableSierra Leone to reach itsmillennialobjectivesby 2015, particularly reducing by half thepoverty afflicting 70 per cent of the popula-tion.

Public accounts remain deeply in deficit.Tax reforms underway have been strugglingto increase taxes in a country where the taxburden is among the lowest in sub-SaharanAfrica, while spending on infrastructure andcombating poverty remain incompressible.There has also been a continuing currentaccount imbalance. Despite improvement in

the terms of trade, ore exports have notsufficed to offset the increase in imports ofcapital goods needed in developing mininginfrastructure. In this context, covering in-ternal and external financing needs contin-ues to depend on international aid. SierraLeone’s cooperation with the IMF should,however, lead in the near term to significantforeign debt relief under the HIPC and MDRIprogrammes.

The holding of democratic elections inAugust 2007, the first since the civil warended constituted a further step in theprocess of reconstructing the country. Themain opposition formation, the All People’sCongress, was the winner in voting that tookplace in a context of limited violence. Thenew President Ernest Koroma will, however,have to take up important challenges like re-integrating some 70,000 former combatantsand the return of refugees. To accomplishthis, the new President, a trained economist,intends to lead and manage the country likea business and make the anti-corruptioncampaign the priority of his term in office.

SIERRA LEONE

493

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 9.3 7.4 7.3 7.4 7.4 7.0Inflation (%) 7.5 14.2 12.1 12.2 10.8 10.2Public sector balance (%GDP) −14.5 −12.4 −12.8 −9.0 −12.2 −13.9Exports 146 171 190 245 296 332Imports 295 274 362 389 443 475Trade balance −149 −103 −171 −144 −147 −143Current account balance (%GDP) −14.1 −11.5 −14.6 −10.3 −10.1 −9.3Foreign debt (%GDP) 167 193 167 138 111 103Debt service (%Exports) 30.1 27.4 20.8 14.5 14.2 14.0Foreign exchange reserves (in months ofimports)

1.6 3.6 3.8 3.5 3.4 3.5


SUB-SAHARAN AFRICA

494

South AfricaPopulation (million inhabitants): 47.4GDP (US$ million): 254,992


STRENGTHS• With the country generating 40 per cent

of African GDP, its economic and politicalinfluence has been an inescapable fact onthe continent.

• South Africa boasts extensive mineralresources, diversified industry and anoutperforming tertiary sector (banks,telecommunications, transports).

• With public finances under control andthe country’s external financing needs atmoderate levels, debt has been low.

• With the country’s goodcreditworthiness, the governmentcontinues to enjoy substantial borrowingcapacity.

• Tight economic management, inconjunction with a good businessenvironment, constitutes a major asset.

WEAKNESSES• The social and economic dualism

inherited from the apartheid era and nowreflected by a wage gap has been a sourceof social and political tensions.

• The campaigns against poverty,unemployment and the AIDS pandemichave made it necessary to increase thegrowth rate, which in turn requireseliminating economic bottlenecks.

• A shortage of skilled labour has stalledimplementation of vast investmentprojects in the transport and energysectors.

• With its growing financing needs, SouthAfrica has been vulnerable to a crisis ofinvestor confidence.

RISK ASSESSMENTEconomic activity, which has been remarka-bly dynamic since 2004, slowed slightly in2007 with tighter credit controls and higherinterest rates facilitating a soft landing forhousehold demand. In 2008, investmentshould become the new engine of stronggrowth even if the shortage of skilled labourshould delay infrastructure programmes.Those favourable economic conditions, whichhave benefited construction, financial serv-ices and manufacturing, have bolstered cor-porate solvency as evidenced by a Cofacepayment incident index remaining below theworld average.

The tight fiscal policy these past years hasallowed the government to gain substantial

leeway in supporting the economy withoutincreasing public debt. The energy bill andthe increases in imports of consumer andcapital goods have contributed to furtherundermining the current account deficits.Although the limited foreign debt burden hastended to ease insolvency risk, the countryhas moreover remained vulnerable to foreignexchange liquidity crisis risk. Especiallywithits financing needs largely covered by volatileportfolio investment and with the prospectslimited for a significant increase in directinvestment. The considerable credibility ofthe Central Bank, which has been takingpains to bring inflation within its targetrange (between 3 and 6 per cent), shouldlimit exchange rate volatility.

SOUTH AFRICA

495

5

In the political field, the election ofJacob Zuma, supported by the CommunistParty and the Congress of South AfricanTrade Union (COSATU) , as president of theAfrican National Congress (ANC) in Decem-ber 2007 has raised uncertainties about thecountry’s political and economic direction.Year 2008 may see a leadership crisis andearly presidential elections since the currentpresident, Thabo Mbeki, has been weakened

by defeat in the ANC elections. Furthermore,newly elected Zuma is currently facing judi-cial charges. In this context, the electioncontest to choose Mbeki’s successor, sched-uled for 2009 at the latest, remains wideopen. Moreover, social risks have remainedsignificant, stoked by the frustrations of thelarge proportion of the population that hasnot benefited from the fruits of economicgrowth.


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 3.1 4.8 5.1 5.0 4.5 4.8Inflation (%)* 4.0 4.3 4.0 5.0 6.1 5.3Public sector balance (%GDP) -2.3 -1.5 -0.3 0.3 0.6 -0.1Exports 38.5 48.1 55.4 64.1 70.7 78.6Imports 35.0 48.3 56.6 70.4 76.6 84.2Trade balance 3.5 -0.2 -1.2 -6.3 -5.9 -5.6Current account balance (%GDP) -1.1 -3.2 -3.8 -6.3 -5.8 -5.3Foreign debt (%GDP) 22.9 20.2 19.1 22.4 24.3 24.5Debt service (%G&S exports) 13.0 9.9 7.2 8.1 7.9 7.7Foreign exchange reserves (in months of imports) 1.5 2.3 2.8 2.8 3.0 3.0

* = current December price level compared to previous December, e = estimate, f = forecast


■ Market overviewSouth Africa’s trade liberalisation started in1990 and got a much-needed fillip from WTOaccession in 1994. The country uses theWorld Customs Organisation’s harmonisedinternational nomenclature. Customs dutieshave been slashed. The cuts have beenfacilitated by the Trade, Development andCo-operation Agreement signed between theEU and Africa in 1999, the full impact ofwhich will be felt in 2012. Talks have begunto amend this agreement. Talks are alsounder way in Southern Africa on economicpartnership agreements (EPAs) between theEU and the countries of the region, includingSouth Africa.

■ Means of entryUnder the free-trade agreement signed withthe EU in October 1999 and implemented inJanuary 2000, about 86 per cent of productsimported from the EU will be exempt fromcustoms duty by 2012. South Africa is not a

signatory to the WTO government procure-ment agreement. Tenders have traditionallybeen overseen at central level by the StateTender Board and at local level by one ofnine Provincial Tender Boards. However, acommon service provider is shortly to replacethe Tender Boards with the aim of facilitatingthe adoption of a uniform policy on govern-ment procurement in line with the StateTender Board Act. The Preferential Procure-ment Policy Framework Act, in force sinceFebruary 2000, creates a points system thatfavours companies whose shareholders ormanagers are ‘historically underprivilegedpeople’ (blacks, mixed-race, Indian), womenand the disabled. Public procurement inSouth Africa serves to widen Black EconomicEmpowerment (BEE) by encouraging SouthAfrican and foreign companies to team upwith Black partners. Where a public tenderexceeds US$10 million, foreign companiesare required to contribute a 30 per centcompensatory package (offset) on the totalvalue of imports under the National Indus-trial Participation Programme.

SUB-SAHARAN AFRICA

496

Current legislation imposes restrictions onforeign investment in the audiovisual sector.Consequently, no foreign investor may ownmore than 20 per cent of a local radio ortelevision company.

The South African Bureau of Standards(SABS) co-operates with a large number ofsimilar international bodies to harmonisetechnical standards and regulations. Inter-national standards such as IEC and ISO, aswell as a vast number of Europeanstandards,are recognised by the Bureau, but must stillbe approved by it.

■ Attitude towards foreign investorsForeign companies are subject to numerousstatutory obligations and orders, especiallyin matters of BEE, positive discriminationand immigration. They operate in an admin-istrative environment which can lack trans-parency and predictability, especially in

matters of government procurement andadministrative procedure.

About 80 per cent of imported goods areinvoiced in US dollars. Other widely usedcurrencies include the euro, the pound ster-ling and the South African rand. Paymentinstruments in South Africa, which has asophisticated financial services sector, aresimilar to those available in Europe and theUnited States.

■ Foreign exchange regulationsThe regulations for ordinary business trans-fers by non-residents have been liberalised.Currency traders are of the opinion thatthere are no de facto exchange controls anylonger. Capital transactions – in particularloans from a parent company to a SouthAfrican subsidiary – remain subject to somerestrictions. Relaxation measures aimed atremoving restrictions on the size of foreigninvestment came into force in October 2004.


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June 9

3

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3

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4

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4

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5

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5

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6

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7

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7

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8

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9

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9

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0

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0

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1

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1

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2

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3

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4

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5

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6

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6

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7

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7

WORLDSouth Africa

SOUTH AFRICA

497

5

OPPORTUNITY SCOPE



Mn USDMn USD


Japan UKUSA Germany Netherlands ChinaGermany USA SaudiArabia

Japan

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%

■ Machinery and transport equipment 39%■ Other manufactured goods 20%■ Oil products 15%■ Chemicals 10%■ Other 17%

IMPORTS by products

010002000300040005000600070008000

0

2000

4000

6000

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10000



Indicators South Africa Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

498

SudanPopulation (million inhabitants): 37.0GDP (US$ million): 37,565


RISK ASSESSMENTSocial and political risk remains critical. Thefailure of the peace accords concluded in May2006 caused instability to spread from theDarfur region to Chad and the CentralAfrican Republic. Complicating the stabilis-ation process even more, the internationalcommunity has been struggling to identifycredible interlocutors, with dissension be-tween the various Arab tribes intensifying.Implementation of the February 2005 peaceaccord with the south was moreover calledinto question last year by the withdrawalfrom the national unity government of thesouth’s representatives dissatisfied with thedivision of resources. In this context, there isappreciable risk of a resurgence of civil warthat would no longer be limited to Darfur butwould again engulf the south.

Despite international sanctions, economicconditions are still good, underpinned by theoil sector and dynamic investment mostlyfrom China. The buoyant growth has facili-

tated the management of public sector fi-nances and the consolidation of externalaccounts which remain however in deficitwith the invisibles balance undermined byrepatriation of dividends from extractiveindustries. In this context, financing needshave been declining and are still largelycovered by direct investment inflows. GDPgrowth has similarly resulted in improve-ment in debt ratios, without the benefit ofbilateral debt cancellation.

New international sanctions notably en-tailing a freeze on the assets of Sudanesecompanies abroad should moreover ulti-mately restrict Sudan’s access to interna-tional financing. The conversion of foreignexchange reserves to euros effected by thecentral bank in 2007 will likely destabilisethe banking sector indefinitely. Sudan’s fu-ture development will remain dependent onthe political situation and reconstruction ofinfrastructure devastated by twenty years ofcivil war.

SUDAN

499

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 7.1 5.1 8.6 11.8 11.2 10.7Inflation (%) 7.7 8.4 8.5 7.2 8.0 6.5Public sector balance (%GDP) 0.7 -1.5 -1.8 -4.6 -4.4 -3.5Exports 2,577 3,778 4,878 5,813 7,567 9,440Imports 2,536 3,586 5,946 7,105 7,518 9,000Trade balance 41 192 -1,068 -1,292 49 440Current account balance (%GDP) -7.7 -6.6 -11.5 -15.7 -11.6 -9.7Foreign debt (%GDP) 145 107 96 71 60 53Debt service (%G&S exports) 33.8 26.0 20.9 16.9 14.3 11.9Foreign exchange reserves (in months ofimports)

0.9 2.2 2.4 1.7 1.4 1.7


SUB-SAHARAN AFRICA

500

TanzaniaPopulation (million inhabitants): 39.5GDP (US$ million): 12,784

Country @rating: BMedium-term rating: High riskBusiness climate rating: D

STRENGTHS• Tanzania’s political stability, regional

integration within the East AfricanCommunity (EAC) and close cooperationwith the international community havefacilitated progress on structuralreforms.

• Tanzania, which has enjoyed broadsupport from the internationalcommunity, obtained in 2005 substantialpublic sector foreign debt reductionunder the HIPC and MDRI programmes.

• The country nonetheless boasts extensiveeconomic potential (arable land, gas,mineral wealth, tourism).

• The Tanzanian Investment Centre’sefforts to facilitate foreign investmenthave produced results.

WEAKNESSES• Tanzania is still among the poorest sub-

Saharan countries with life expectancy atbirth only 47 years.

• It remains very dependent oninternational aid.

• The economy is handicapped byinsufficiently developed energyinfrastructure.

• Relations with the semi-autonomousIsland of Zanzibar, where the economicsituation has been poor, have remainedtense.

RISK ASSESSMENTGDP growth strengthened to 7.3 per cent in2007, driven by a good harvest season and theresumption of energy delivery. It shouldreach 7.7 per cent in 2008 spurredby thestartof exploitation of new mine fields and devel-opment of road and tourist infrastructure.

Despite prudent macroeconomic policy, theimbalances in public and external accountsare still substantial. The public sector bal-ance remains undermined by a narrow taxbase – limited by the high-poverty rate in thecountry, an extent of the informal economy,and the preferential tax regime granted toforeign investors – with the necessary invest-ment spending on infrastructure, health andeducation continuing to grow. The currentaccount, meanwhile, will likely continue to

show a large deficit, exacerbated by capitalgoods imports, even should the steadiness ofgold prices lead to improvement in the termsof trade. In this context, covering internaland external financing needs will remaindependent on international aid.

In the political arena, President JakayaKikwete, elected in December 2005 with 80per cent of the votes cast has not initiated thereforms so hoped for by the public, especiallyin the area of corruption. He has moreoverproven incapable of findinga durablesolutionto the Zanzibar problem. He intends, how-ever, to strengthen Tanzania’s regional influ-ence with the country notably named to headthe SADC’s mediation mission to Zimbabweand selected as host for one of the key Sum-mits on the Darfur crisis in 2007.

TANZANIA

501

5


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.7 6.7 6.5 6.7 7.3 7.7Inflation (%) 4.4 4.1 4.4 7.3 5.6 5.0Public sector balance (%GDP) -9.3 -11.1 -11.6 -12.5 -12.3 -11.2Exports 1,299 1,594 1,736 1,830 2,131 2,296Imports 2,159 2,728 3,436 4,081 4,672 5,092Trade balance -860 -1,134 -1,700 -2,251 -2,541 -2,796Current account balance (%GDP) -6.9 -10.1 -12.6 -15.4 -15.3 -15.1Foreign debt (%GDP) 73.6 70.5 64.5 35.5 36.2 36.0Debt service (%Exports) 4.5 5.2 3.0 1.4 1.5 1.5Foreign exchange reserves (in months ofimports)

7.2 8.1 6.8 5.9 5.0 5.0



■ Conditions of access to the marketImport duties within the EAC have beenharmonised at 0, 10 and 25 per cent accordingto the degree of product transformation.Some goods are duty-exempt (unpackageddrugs, gold, gems, perishable goods); otherslike foodstuffs, live animals, fish, reptiles,firearms and ammunition require an importpermit. Tanzania has set up free zones – orexport processing zones (EPZs) – which aremanaged by the National Development Cor-poration (NDC), a separate entity from theTanzanian Investment Centre. Capitalgoodsmay be imported duty-free into these zonesbut are liable to VAT. The tourism industryenjoys tax breaks subject to the issue of acertificate of incentive by the Tanzania In-vestment Centre (TIC) for a fee of US$750.Tanzania applies article VII of the WTOwhich provides for pre-shipment goods in-spection and valuation. The importer’s bankis responsible for submitting the file to thepre-shipment inspection (PSI) agency whichthen forwards it to its agent in the country oforigin of the goods.

A 20 per cent VAT is levied on the CIFvalue of goods, marked up by customs andexcise duties and all applicable import levies.A rate of 0 per cent applies to importsfinanced out of the budget of internationaldonors.

There are no exchange controls in Tanza-nia. It is up to the contracting parties todecide which payment instrument to use.Most transactions are carried out in Tanza-nian shillings or dollars, although the euro isgaining ground.

■ Means of entryThe Tanzania Investment Act has estab-lished a one-stop shop for investors, the TIC.Foreign equity in investment projects mustbe equal to or higher than US$300,000 inexchange for a certificate of incentives.

Legislation relating to the free zones, setup in 2002, is extremely investor-friendly,but imposes an obligation to export 70 percent of production. Restrictions on propertyownership and a system of permits forfoodstuffs are the main obstacles to marketaccess. Work permits are issued to foreignerson a regulated basis.

■ Attitude towards foreign investorsThe Tanzanian government proactively pro-motes foreign direct investment (FDI) thatdevelops exports, facilitates the transfer oftechnology and creates jobs. Tanzania is theleading recipient of FDI in the region(US$377 million in 2006, compared withUS$307 million for Uganda and US$51million for Kenya). Growth sectors includemining, telecommunications, energy and ag-riculture. Tanzania is still heavily assistedby international aid donors on account of itsstatus as a LDC.

SUB-SAHARAN AFRICA

502

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Gold 44%■ Fishing products 12%■ Manufactured goods 9%■ Coffee 4%■ Cotton 4%■ Tobacco 4%■ Cashews 4%■ Other 20%

■ Capital goods 39%■ Consumer goods (excluding foodstuffs) 21%■ Fuels 19%■ Intermediate goods (excluding fuels) 13%■ Foodstuffs 8%

IMPORTS by products

China NetherlandsHongKong

Japan UAE SouthAfrica

KenyaChina India UAE0

30

60

90

120

150

0

100

200

300

400

500



Indicators Tanzania Regional averageEmergingcountry average

GNP per capita (PPP dollars) 740 2,029 5,983GNP per capita (USD) 350 842 2,313Human Development Index 0.418 0.450 0.672Wealthiest 10% share of national income 27 34 31Urban population percentage 35 37 44Percentage under 15 years old 43 43 30Number of computers per 1,000 inhabitants 7 18 50

TOGO

503

5

TogoPopulation (million inhabitants): 6.3GDP (US$ million): 2,206


RISK ASSESSMENTIn 2007, economic growth remained belowaverage for sub-Saharan Africa hampered byrepeated breakdowns in the delivery of en-ergy and by the weak recovery of cottonproduction, limited to a quarter of the aver-age level recorded between 2001 and 2005.Forecasts for 2008 call for a significantincrease in cotton production in the wake ofthe SOCOTO Togolese cotton company’s debtwipe-off intended to enable Togo to benefitfully from the firm cotton prices. The im-provement in energy delivery and the inten-sification of public sector and foreigninvestment in transport infrastructure, es-pecially ports, should moreover enablegrowth to climb to 3.5 per cent.

Public sector accounts continue to showimbalances with tax revenues not sufficingto cover rising investment spending onhealth, education and infrastructure. De-spite improvement in the terms of trade,meanwhile, it has been a struggle to offsetcapital goods imports and increasedspendingon oil with phosphate exports. In the absence

of international aid and FDI, the debt hasreached unsustainable levels. The resump-tion of relations with multi-lateral financialbackers not only paves the way to a povertyreduction and growth facility (PRGF) agree-ment — the IMF’s special low-interest lend-ing programme for poor countries — but alsoallows Togo to look forward to debt relief inthe medium term under the HIPC and MDRIprogrammes.

The holding of free and transparent legis-lative elections in October 2007 was a turningpoint in the Togolese government’s interna-tional rehabilitation. The elections markedthe end of the period of severe politicalinstability initiated in 2005 with the con-tested election as president of Faure Gnas-singbe, son of General Eyadema, deceased inFebruary 2005. The recent successful elec-tions will facilitate a renewal of cooperationwith the EU and international financialinstitutions since they broke off all relationsin 1998. Carrying out far-reachingstructuralreforms could come up against strong resis-tance from the professions concerned, nota-bly opposition from the army.

SUB-SAHARAN AFRICA

504


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.2 2.3 1.2 2.0 2.9 3.5Inflation (%) -0.9 0.4 6.8 2.2 3.2 3.0Public sector balance (%GDP)* 1.8 0.2 -3.6 -4.2 -5.1 -5.8Exports 598 613 597 612 668 722Imports 755 870 944 1,041 1,169 1,278Trade balance -157 -257 -347 -429 -501 -555Current account balance (%GDP)* -9.2 -3.7 -6.5 -7.4 -9.6 -9.5Foreign debt (%GDP) 95.1 92.9 80.8 84.6 80.3 79.2Debt service (%G&S exports) 13.3 9.8 6.4 5.4 5.4 5.5Foreign exchange reserves (in months ofimports)

2.8 3.8 1.9 3.3 2.9 2.9


UGANDA

505

5

UgandaPopulation (million inhabitants): 29.9GDP (US$ million): 9,322


STRENGTHS• Uganda has remarkable economic

potential (agriculture, fishing, tourismand ore).

• Exploitation of recently discovered oilresources should enable the country toreach energy independence by 2011.

• Greater integration into EAC, the EastAfrica Community, constitutes anadditional asset.

• With a sustained policy of structuralreforms, Uganda has won the backing ofthe international financial community.

• The country has benefited fromsignificant foreign debt relief under theHIPC and MDRI programmes.

• The progress made on improvingeducation, combating poverty andimproving public health conditions hasbeen encouraging.

WEAKNESSES• GDP growth potential, underpinned by

one of the world’s fastest growingpopulations, remains limited bytransport, energy and public-servicebottlenecks.

• The continuing environment ofinstability in the Great Lakes region anda difficult business climate limit thecountry’s interest for investors.

• The country’s development potentialremains largely unrealised and,concomitantly, its economic fabric lacksdiversification.

• The country’s landlocked position anddefective infrastructure inflateproduction costs.

• Agriculture is still preponderant (33 percent of GDP, 70 per cent of employment)with coffee, tea and horticultural productexports remaining vulnerable to weatherconditions and world price trends.

RISK ASSESSMENTDespite repeated energy supply breakdowns,the economy rebounded in 2007, driven bythe telecommunications and civil engineer-ing sectors. The Commonwealth Summit ofHeads of State governments hosted by Kam-pala along with transport and energy infra-structure investments (Bujagali Dam)spurred civil engineering activity in particu-lar. GDP growth should remain strong in2008, driven by large investments in oilexploration. The strong growth has allowedUganda to approach its Millennium Devel-opment Goals, especially as regards reducing

the poverty rate, which improved spectacu-larly from 56 per cent in 1992 to 31 per centin 2007.

Public sector accounts are structurallyimbalanced. Even with current spendingtrending down, tax revenues still do notsuffice to cover rising investment spending.Imports of capital goods imports and oil havemoreover been growing faster than exports,despite firm coffee prices. The country haslittle foreign debt, however, thanks to reliefextended under the HIPC and MDRI pro-grammes. The presence of new financialbackers outside the Paris Club could, how-

SUB-SAHARAN AFRICA

506

ever, contribute to significant increase inoutstanding debt. In this context, interna-tional aid will remain essential to coverinternal and external financing needs.

In the political arena, President Musevinihas succeeded in leveraging the generalelections held in March 2006 without in-cident, the first such elections in 25 years,to rehabilitate his image on the interna-tional scene and resume cooperation withmultilateral institutions that are sources ofaid. Donor countries have, however, calledfor a strengthening of governance andgreater political liberalisation. The security

situation in the north of the country, mean-while, has remained precarious. Despite theprogress made in the talks under way sinceJuly 2006 to bring to an end 18 years ofhostilities, the LRA – Lord’s ResistanceArmy – has refused to lay down its armsas long as the International Criminal Courtthreatens action against its members. Therehave moreover been perceptible tensionsbetween Uganda and the Democratic Re-public of Congo over the exploitation ofLake Albert oil, and the risks of destabi-lisation remain high especially with Sudanand Chad nearby.


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 4.5 5.7 6.7 5.4 6.2 6.5Inflation (%) 5.7 5.0 8.0 6.6 7.5 5.1Public sector balance (%GDP)* -10.8 -10.7 -8.5 -7.4 -8.4 -7.9Exports 512 647 786 890 1,180 1,270Imports 1,131 1,321 1,624 1,991 2,377 2,900Trade balance -619 -674 -838 -1,101 -1,197 -1,630Current account balance (%GDP)* -14.0 -11.0 -10.6 -9.9 -8.6 -11.4Foreign debt (%GDP) 68.2 68.7 57.7 57.7 13.6 16.7Debt service (%G&S exports) 8.2 7.9 7.3 4.3 2.7 3.0Foreign exchange reserves (in months ofimports)

6.4 6.6 6.3 5.7 7.6 7.4



■ Market overviewThe introduction in January 2005 of a cus-toms union between the member countries ofthe East Africa Community (EAC) has led tothe harmonisation of tariffs around threerates – 0, 10 and 25 per cent – according tothe degree of product transformation. Zero-rated access is granted to industrial machin-ery and essential goods. Some 426 productsimported from Kenya are liable to temporaryduty at an initial rate of 10 per cent, whichwill be lowered by two points each year overa five-year period. COMESA member coun-tries are granted a preferential tariff alsobased on three rates: 0, 4 and 6 per cent.

Customs declarations must be supportedby an invoice and a certificate of origin, aswell as an import certificate valid for six

months on a renewable basis that can beobtained within 24 hours from the Ministryof Commerce and Industry. Where applica-ble, a health certificate for live animals, animport licence plus a health certificate forplants (fresh fruits, vegetables and seeds)and a disinfection certificate for second-handclothes, bedding and similar articles in-tended for sale must also be produced.Customs clearance takes about a week.

All duties are ad valorem and calculatedon the cost, insurance and freight (CIF) valueof goods transported by road, and on theinsured value of goods transported by air. Aswell as customs duties and a 4 per cent levycalculated on the CIF value (warehousingduty), all imports are charged 0.8 per centimport duty on the free on board (FOB) value(in respect of inspection fees), 2 per cent

UGANDA

507

5

import levy on the CIF value (Import LicenceCommission) and, where applicable, 17 percent VAT and excise duties.

Uganda does not apply minimum importprices or quotas. Several import prohibitionsand restrictions apply on grounds of health,safety, etc. The country observes the mostfavoured nation (MFN) clause for all its tradetransactions.

■ Attitude towards foreign investorsFDI in Uganda is governed by the 1991investment act, which is restrictive on paperbut liberal in its application. The UgandaInvestment Authority (UIA) is responsiblefor handling investment proposals and offer-ing assistance and advice to investors. In apragmatic move, the government has givenit wide powers of initiative to reduce discrim-ination between foreigners and nationals,pending revised, less restrictive legislation.To obtain a licence, foreign investors mustsubmit a business plan to the UIA, alongwith detailed financial statements of theircompany’s activities. The UIA is not overlystrict in this matter and licences are liberallyawarded for a minimum period of five years,provided the investment complies with theact. The time limit for issuing a licence is twoto five days.

The UIA is required to draw up a report oneach investment application within 30 days,and reach a decision within the following 14days. The investment act, however, does not

guarantee foreign investors equal treatmentwith local ones. Foreigners face a number ofobstacles or obligations, including a mini-mum investment of US$100,000, staff train-ing, use of local suppliers, respect for theenvironment, technology transfer, etc. Butno sector of the economy is closed to foreigninvestment. Foreign investors are protectedfrom forced sales. Where a company is subjectto an expropriation order, it is entitled toreceive compensation based on the real valueof its business within 12 months of the dateof expropriation. Property laws continue topose problems for investors seeking land fortheir businesses. In such cases, it is advisableto turn to specialist agencies, law firms orthe UIA as they can offer a number ofsafeguards (land register, identity checks onlandlords).

The shortcomings of the judicial systemconstitute an obstacle to investment. Lack ofprofessionalism, corruption and files that gomissing means it can take years to get ajudgement or conclude an action. However,assistance (and pressure) from lenders hasalready yielded tangible results, such as thesetting up of a Tax Appeal Tribunal.

Uganda has been a member of the MIGAsince 1992. The agency provides investorswith safeguards against non-commercialrisks such as profit repatriation in hardcurrency, foreign currency transfers, breachof contract, labour disputes, etc.

SUB-SAHARAN AFRICA

508

OPPORTUNITY SCOPE



Mn USDMn USD


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%

■ Capital goods 34%■ Foodstuffs 15%■ Chemicals 13%■ Oil and oil by-products 12%■ Other manufactured goods 26%

IMPORTS by products

Belgium FranceNetherlands Germany Rwanda Kenya ChinaUAE India SouthAfrica

01020304050607080

0100200300400500600700800



Indicators Uganda Regional averageEmergingcountry average


ZAMBIA

509

5

ZambiaPopulation (million inhabitants): 11.9GDP (US$ million): 10.907


STRENGTHS• Endowed with extensive mining

resources, Zambia is the world’s largestcobalt producer and Africa’s largestcopper producer.

• The country’s agricultural and touristpotential has been the focus ofdevelopment policy that will facilitatethe necessary economic diversification.

• Zambia has enjoyed the support of theinternational financial community thatresulted in a substantial cancellation ofits foreign debt.

• In addition to tension-free relations withneighbouring countries, the domesticpolitical situation has been stable despiteconsiderable ethnic diversity.

WEAKNESSES• With its continuing dependency on the

extraction of copper, the economyremains vulnerable to exogenous shocks– not only swings in copper prices butalso the impact of weather conditions onthe food supply.

• The high 67 per cent poverty rateafflicting the population is compoundedby a 16 per cent AIDS prevalence rate.

• The exports of this landlocked countryhave suffered from a lack of transportinfrastructure and have been sensitive torising shipping costs.

• The business environment has beenundermined by major shortcomings.

RISK ASSESSMENTDespite strikes and floods hampering coppermine operations, economic growth was stillstrong in 2007, spurred by soaring ore prices,and should exceed 6 per cent in 2008 under-pinned by the dynamism of the building andpublic works sector and the expansion ofproduction capacity. The bright outlook forraw material prices is conducive to invest-ment in extraction and prospecting for deepcopper and cobalt.

Despite prudent macroeconomic policy,hailed by international financial backers, afiscal deficit is likely to persist due to anexcessively narrow tax base, particularlyfavourable to foreign investors. Zambia’sexternal position has improved, meanwhile,

thanks to cancellation of US$3.3 billion indebt under the HIPC and MDRI pro-grammes. Its financing needs are nonethe-less still large with the country remainingdependent on internationalaid to cover them.

Although re-elected in September 2006with 43 per cent of the votes cast, PresidentMwanawasa has been contending with pro-tests by the urban population in areas asstrategic as the capital Lusaka and the maincopper-producing region, known as the ‘cop-per belt’. The government will have to meetthe challenge of achieving an equitable redis-tribution of the fruits of growth. The tensionsshould not, however, jeopardise the reformssupporting modernisation of the financialsector and improvement of the businessenvironment.

SUB-SAHARAN AFRICA

510


USD millions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) 5.1 5.4 5.2 5.9 6.0 6.2Inflation (%) 21.4 18 18.3 9.0 11.3 5.7Public sector balance (%GDP) -13.5 -7.2 -8.2 -7.1 -7.5 -6.4Exports 1,061 1,779 2,221 3,819 3,793 3,268Imports 1,393 1,727 2,211 2,636 3,063 3,311Trade balance -332 52 10 1,183 730 -43Current account balance (%GDP)* -15.9 -12.2 -11.8 -1.4 -7.8 -5.5Foreign debt (%GDP) 150 130 81 12 12 14Debt service (%Exports) 15.0 18.5 6.7 4.0 5.0 6.0Foreign exchange reserves (in months ofimports)

1.2 1.0 1.5 1.7 2.4 2.7

* = ex donations, e = estimate, f = forecast


■ Means of entryGoods may be freely exchanged, and importsof certain goods in the agricultural andmining sectors are exempt from duty. ATAcarnets are accepted. Customs clearance isusually completed within 72 hours of thegoods being presented. Imports may be con-solidated. For an import to qualify for pref-erential treatment, a COMESA or SADCcertificate of origin is required. Excise dutiesvary between 5 and 125 per cent of theproduct’s value, and customs duties between0 and 25 per cent. VAT is levied at the rateof 17.5 per cent.

There is also a duty drawback systemallowing local businesses to obtain a refundof the duties and levies paid on inputs,provided the products manufactured areexported. Various means of payment can beused. However, documentary credit is rec-ommended.

■ Attitude towards foreign investorsThe Investment Act 1993, amended in 1998,guarantees freedom of investment inZambia.

Some sectors – tourism, mining, air and roadtransport, financial services – require anadditional operating licence. There are norestrictions against foreign shareholdings onthe statute book, and the Lusaka stockexchange is open to foreign investors. Cor-poration tax varies between 15 and 45 percent according to activity. Profits are fullyrepatriable. Free zones (export processingzones, EPZs) introduced in 2003 offer foreigninvestors tax benefits such as exemptionfrom corporation tax and excise duties. Thecountry has reciprocal investment protectionand double taxation agreements with severalcountries, including France. Disputes be-tween a foreign investor and a local party aresubject to local or international arbitration(ICSID, UNICITRAL). Zambian law makesit difficult to employ expatriates and 50 percent of managers must be Zambian.

■ Foreign exchange regulationsThere are no exchange controls in Zambia. Aforeign resident may open a foreign currencyaccount with a local bank. There are nohedging arrangements against exchangerisk. Financial transactioncostsremainhigh.

ZAMBIA

511

5

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Copper 69%■ Ores 12%■ Other metals 4%■ Other 15%

■ Machinery 21%■ Chemicals 18%■ Fuels 15%■ Vehicles 10%■ Electrical equipment 8%■ Iron and steel 3%■ Other manufactured goods 24%

IMPORTS by products

Switzerland ThailandSouthAfrica

China Italy SouthAfrica

UAEZimbabwe China India0

100200300400500600700800

0

300

600

900

1200

1500



Indicators Zambia Regional averageEmergingcountry average


SUB-SAHARAN AFRICA

512

ZimbabwePopulation (million inhabitants): 13.1GDP (US$ million): 5,010


STRENGTHS• Zimbabwe boasts considerable

agricultural, tourist and mineralpotential – platinum (world’s secondlargest producer), palladium, gold andnickel.

• Its industrial fabric is diversified.• Quality transport and financial

infrastructure along with a well-trainedlabour force could facilitate efforts torevive the economy.

WEAKNESSES• The country’s economy and finances are

still in a disastrous state and overcomingthe crisis effects will take some time.

• The economic crisis, which has furtherheightened political and social tensions,has moreover exacerbated thedeteriorating food and health situation inthe country, with a majority of thepopulation dependent on internationalaid for subsistence.

• The AIDS infection rate is among thehighest in Africa and the world with a25-per cent prevalence rate in the adultpopulation.

RISK ASSESSMENTThe recession that has gripped the countrysince 1999 and caused a 40 per cent reductionin GDP intensified in 2007. The economyshould, however, only contract by 3.6 percent in 2008 with some improvement ex-pected in mining extraction, especially goldand platinum – whose prices have beentrending up – along with a modest recoveryin the agricultural sector. The marked depre-ciation of the Zimbabwe dollar exchangerates, which has accentuated the increasingcost of imported products, and the monetisa-tion of public and parapublic deficits willnonetheless continue to fuel hyperinflation.

Despite a foreign exchange system favour-

able to exporters and the firmness of rawmaterial prices, foreign currency revenueshave not increased. With its foreign debt nowunsustainable, the country is constantly inarrears to most of its creditors. In thiscontext, the current debate over a possiblenationalisation of mining companies and anotherwise poor business climate have limitedinvestor interest in the country, which fur-ther delays a hypothetical recovery.

The substantial economic deteriorationnotwithstanding, President Mugabe, aged82, has deftly exploited divisions within hisown ZANU PF camp to impose himself as theparty’s candidate in next presidential elec-tions in March 2008. He is sure of re-election.

ZIMBABWE

513

5


USD billions 2003 2004 2005 2006 2007(e) 2008(f)

Economic growth (%) -10.4 -3.8 -7.2 -4.1 -5.7 -3.6Inflation (%) 365 350 255 1,027 2,880 6,470Public sector balance (%GDP) -0.4 -7.7 -16.1 -43 -34.9 -34.9Exports 1,670 1,680 1,694 1,727 1,800 1,900Imports 1,778 1,989 2,053 2,000 2,100 2,200Trade balance -108 -309 -359 -273 -300 -300Current account balance (%GDP) -3.1 -7.3 -6.8 -6.8 -7.7 -8.0Foreign debt (%GDP) 64.4 67.4 75.9 83.7 93.2 96.7Debt service (%Exports) 21.4 16.9 16.4 16.8 16.5 15.8Foreign exchange reserves (in months ofimports).

0.1 0.5 0.0 0.0 0.0 0.0



■ Means of entryGoods can be freely exchanged from a legalstandpoint, although a certificate of origin isrequired for imports. Customs duties varybetween 0 and 138 per cent according to thetype of import, except for goods from CO-MESA which are exempt from duties on thebasis of reciprocity. Since 1 August 2005,VAT on all imports has risen to 17.5 per centfrom 15 per cent, the rate in force when VATwas introduced on 1 January 2004. A 15 percent surtax applies to all products chargedmore than 30 per cent customs duty.

Due to the now chronic shortage of hardcurrency, exporters are strongly advised todemand advance payment. While many com-panies, especially in mining, have off-shoreaccounts, experience shows that some, usu-ally from other sectors, use the restrictionson obtaining foreign exchange from theReserve Bank as an excuse for not payingtheir bills.

■ Attitude towards foreign investorsThe Investment Act 1989 guarantees protec-tion of foreign investment. A 100 per centforeign ownership is allowed in mining,manufacturing and tourism, 70 per cent inservices and 35 per cent in agriculture,

armaments and water. Since 1 January1995,all profits and dividends may be repatriatedafter payment of taxes. However, moneytransfers remain a rarity in a country suffer-ing an acute shortage of foreign exchange.Companies operating in Zimbabwe are liableto a 20 per cent tax on the dividends earnedby their foreign-based subsidiaries. A 3 percent tax is levied on all companies to supportthe fight against AIDS. Zimbabwe has adouble-taxation agreement with France andsome other countries. However, the recipro-cal investment protection agreement signedwith France in May 2001 was never ratified,notwithstanding several attempts by theFrench government to obtain its ratification.

Since September 2007, the so-called new‘indigenisation’ law requires foreign compa-nies to sell off at least 50 per cent of theirZimbabwean subsidiaries to local interests.Disputes between a foreign investor and alocal party are subject to local or interna-tional arbitration.

■ Foreign exchange regulationsHyperinflation – followed by the massivedevaluation of the Zimbabwean dollar −makes it virtually impossible to maintain astable currency regime. The country’s tradi-tional dual currency market is unworkablein practice.

SUB-SAHARAN AFRICA

514

OPPORTUNITY SCOPE



Mn USDMn USD


EXPORTS by products■ Foodstuffs 30%■ Aluminium and platinum 16%■ Gold 16%■ Tobacco 14%■ Manufactured goods 24%

■ Fuels 21%■ Chemicals 20%■ Foodstuffs 19%■ Machinery 14%■ Manufactured goods 14%■ Other 13%

IMPORTS by products

SouthAfrica

ZambiaChina Japan USA SouthAfrica

BotswanaChina Zambia Germany0

100200300400500600700800

0

200

400

600

800

1000

1200



Indicators Zimbabwe Regional averageEmergingcountry average


ACRONYM TABLE AND LEXICON

515


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 theUS 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


516

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 indebtedpoor countries, which can permit cancellation of their public external debt once they meetspecified 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 topayment difficulties experienced by debtor nations

Payment incidents index: payment default indices reflect the payment-incident trend oncommercial transactions payable in the short term worldwide across a broad range of economicsectors. The monitoring of payment incidents is based on a composite of several sets ofcompany-payment–capacity indicators available in Coface databases: those derived directly fromits credit insurance, receivables management and company information activities, and thoseobtained from partners. Payment incidents are expressed as indices based on the average ofincidents recorded over the world between 1995 and 2000. The resulting curves thus permitcomparing a country’s or sector’s payment risk level with the world average as well as monitoringthe trend of those risks


517

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 worldwidenetwork whereby messages concerning financial transactions can be exchanged between banksand other financial institutions in 194 countries

SYSCOA: Systeme Comptable Ouest-Africaine (West African Accounting System)

TRIPS: Trade-Related Aspects of Intellectual Property Rights

UEOMA/WAEMU: Union Economique et Monetaire Oust Africaine/West African Economic andMonetary 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

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