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Macroeconomicand Country Risk Outlook

EconomicOutlook no. 1202-1203December 2013-January 2014

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Top Ten Game Changersin 2014Getting back in the game

Economic Research

Economic Outlook no. 1202-1203 | December 2013-January 2014 | Macroeconomic and Country Risk Outlook Euler Hermes

2

economic Research euler hermes Group

economic Outlookno. 1202-1203macroeconomicand country Risk outlook

Contents

the economic outlook is a monthlypublication released by the EconomicResearch Department of Euler Hermes.This publication is for the clients of EulerHermes and available on subscriptionfor other businesses and organisations.Reproduction is authorised, so long asmention of source is made. Contact theEconomic Research Department publication directorand chief econo-mist: Ludovic Subran macroeconomic Research and countryRisk: Andrew Atkinson, Ana Boata, Ma-hamoud Islam, Dan North, ManfredStamer (Country Economists), NicolasBargas, Rémy Carasse and ClémentineCazalets (Research Assistants) sector and insolvency Research:Maxime Lemerle (Head), Bruno Goutard,Yann Lacroix, Marc Livinec, Didier Moizo(Sector Advisors) editor: Martine Benhadj Graphic design: Claire Mabille support: Laetitia Giordanella For further information, contact theEconomic Research Department of EulerHermes at 1, place des Saisons 92048Paris La Défense Cedex – Tel.: +33 (0) 184 11 41 15 – e-mail: [email protected] > Euler Hermes is a limitedcompany with a Directoire and Supervi-sory Board, with a capital of14468072,64 EUR, RCS Paris B 388236853 photoengraving: Évreux Compo France– Permit December 2013-January 2014;issn 1 162 – 2 881 ◾ January 15, 2013 ◾

3 editoRial

4 oveRview

8 countRY Risk outlook

10 ◼ Game changer #1:China’s transformation will be under control

11 ◼ Game changer #2:The United States will re-industrialize with or without easy money

12 ◼ Game changer #3:The Eurozone must keep its eye on the ball,but the ball is rolling

13 ◼ Game changer #4:The monetary musketeers and Japan’sd’Artagnan

14 ◼ Game changer #5:“It's the price, stupid!”- when disinflationmatters in the advanced economies

15 ◼ Game changer #6:Periphery countries - dodging the liquidity crunch, piggy backing the recovery

16 ◼ Game changer #7:Emerging markets, fragility is a policy thing

17 ◼ Game changer #8:Old and new political risk in 2014

18 ◼ Game changer #9:Building blocks - a new form of protectionism?

19 ◼ Game changer #10:Global rebalancing - don’t put the cart before the horse

20 economic outlook seRies

21 otheR available publications

22 subsidiaRies

3

editoRial

Is the world finally checkinginto rehab?ludovic subRan

I will spare you the entire song that inspired this editorial, as well as any

analogy between the year 2013 in numbers and an attempt to define

Winehouse economics. Yet, for your listening pleasure, here is just the intro of

her signature song: “They tried to make me go to rehab, but I said ‘No, no,

no.’” You certainly get the point, the world eventually decided to address its

dependency problem, after years on easy money and erratic public spending.

Close to overdosing in 2009, it has been a bumpy road to recovery since, in

spite of massive counselling - though treatments do not seem to have evolved

much in the past century - and plenty of autosuggestion - French apothecary

Emile Coué should be canonized for his contribution to avoiding another crisis

in the past years. However, it seems that everything is about to change in

2014, following a very special Central Bankers Anonymous (CBA) meeting:

‘‘Hi, I am Janet and I am a money junky” she said. “Hi Janet” they all replied

timidly. Mario sounded particularly ashamed. “I have been sober for a month”

she continued. Shinzo started to sob, Mark was beaming and Zhou looked a

bit puzzled by what he had just heard. Voilà: this imaginary meeting is the

inspiration behind our first economic outlook of the year! Like the twelve-step

program by Alcoholics Anonymous, we searched for the right steps to a global

recovery. We only found ten of them and, actually, called them game

changers – yes, it sounds like denial. For each game changer, we found a

sponsor (a country or a region) that will be supporting world recovery and

tried to emphasize what rehabilitation meant for close friends and relatives,

that is to say companies. As a matter of fact, the news is not bad: on the one

hand, public spending backsliders (also known as advanced economies) have

been non-indulgent for three years now and, on the other hand, currency

tampering addicts (aka emerging markets) will eventually learn how to

control their cravings. The battle is not won but it certainly looks like

normalization is on its way. Companies will still fear a possible withdrawal

syndrome (the so called “cold turkey”), especially in the beginning. But, with

time, they will mend their margins and their anticipations, less scared of

country risk setbacks. Remember, preventing relapse will not be easy, as

abstinence is far from on the table at this stage, but where there is a will, there

is a way, right?

Euler Hermes Economic Outlook no. 1202-1203 | December 2013-January 2014 | Macroeconomic and Country Risk Outlook

+3.2 %GDP growthin the United States in 2015


4

oveRview

Getting backin the game

RemY caRasse

After falling to +2.3% in 2013 – the slowest pacesince 2009 – world GDP growth is finally gainingtraction: we forecast global activity will growmodestly, by +3.1% in 2014 and +3.3% in 2015.Although emerging economies will remain thebiggest contributors to global growth, economicactivity is set to be more evenly distributed as aresult of improved prospects for advancedeconomies (+2.2% in 2014 and +2.3% in 2015),while growth momentum in emerging markets isexpected to remain relatively moderate (+4.6% in2014 and +4.8% in 2015).

However, mind the gap; 2014 willindeed be a challenging year.Substantial difficulties persist and mayhold back activity, which is already veryfragile. In particular, financing therecovery will be a crucial issue. Weexpect central banks in advancedeconomies will maintain a veryaccommodative monetary policystance for as long as necessary, inorder to sustain the growthmomentum. Nevertheless, aseconomies gain traction, managing a(soft) exit from easy money policieswill be a key point to watch (notably inthe United States), in particularregarding emerging economies thatface both cyclical and liquidity risksand could be directly impacted bymarket expectations, as sparked duringthe summer of 2013. Major electionswill also have to be monitored in keyemerging countries, as well as reformprogress in advanced economiesespecially in the eurozone and Japan.

2.5% 2.5%

4.8%

-1

0

1

2

3

4

5

6

12 13e 14f 15f

5.5%

World imports

Africa and Middle East

Asia-Pacific

Eastern Europe

Western Europe

Latin america

North America

World imports and regional contributions%

Sources: IHS Global Insight, Euler Hermes

to watch

▶ Game changer #1:China’s transformation will be undercontrol

▶ Game changer #2:The United States will re-industrializewith or without easy money

▶ Game changer #3:The Eurozone must keep its eye on theball, but the ball is rolling

▶ Game changer #4:The monetary musketeers and Japan’sd’Artagnan

▶ Game changer #5:“It's the price, stupid!”: when disinflationmatters in the advanced economies

▶ Game changer #6:Periphery countries: dodging theliquidity crunch, piggy backing therecovery

▶ Game changer #7:Emerging markets: fragility is a policything

▶ Game changer #8:Old and new political risk in 2014

▶ Game changer #9:Building blocks: a new form ofprotectionism?

▶ Game changer #10:Global rebalancing: don’t put thecart before the horse


5

Global trade is forecast to benefit fromimproving global prospects: +4.8% in2014 and +5.5% in 2015 (comparedwith +2.5% in 2012 and 2013).Advanced and emerging economiesare expected to grow together: theformer group is set to contribute 41%and the latter 59% of world importgrowth in 2014. Asia will remain themain trade hub but the upswing inNorth America and in the eurozone isongoing.

advanced economies areback in the game! After years of crisis, economic prospects are improving inthe advanced economies, which are set to provide a largercontribution to global growth: about 45% in 2014 and 2015compared with only one-third in 2013. However, downsiderisks to the recovery remain as the eurozone will continueto face headwinds from deleveraging while a prolonged pe-riod of low inflation could make the process painful. In theUnited States, the pace of the Fed tapering will be key. InJapan, domestic demand recovery is still to emerge whilethe implementation of structural reforms will be mandatoryfor investor confidence, given the excessive stock of debt.

North AmericaGDP growth is set to rise from +1.8% in 2013 to +2.9% in2014 and +3.1% in 2015, especially reflecting an expectedrebound in activity in the United States after a soft end-2013.

Recent strong improvements in business confidence, coupledwith an easing in fiscal consolidation, and an expected pickup in investment and consumer spending should indeedboost real GDP growth in the country (to +3.0% in 2014 and+3.2% in 2015). We do not expect any major change in theFed’s policy line: we forecast a progressive tapering so thatpolicy decisions will not interrupt the growth momentum.However, some issues, such as the 2014 debt ceiling expectedin February, require monitoring even if downside risks seemmoderate.

EurozoneThe eurozone will finally return to (modest) growth! Aftertwo years of recession, improved sentiment is expected in2014 on the back of a first round of rebalancing with betterprospects for exports and domestic demand. However, eco-nomic activity is far from buoyant. We forecast GDP growthat +0.9% in 2014 and +1.3% in 2015, mainly driven by

20

30

40

50

60

70ChinaUnited StatesJapanEurozone

1312111009080706050403

Industrial confidence indexManufacturing PMI

Sources: Markit, Bloomberg, Euler Hermes

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

30

35

40

45

50

55

60

65

70Investor confidence (scale L)Confidence in industry (scale R)

13121110090807060504

Global economic cycle indicators

Sources : Markit, Sentix, Euler Hermes


6

stronger activity in Germany (+1.6% in 2014 and +1.7% in2015). Italy and Spain are expected to pull out of recessionin 2014 and to recover progressively in 2015 while activityin France will grow at a very moderate pace (+0.6% in 2014and +1.2% in 2015). Difficulties will remain significant and in-clude continued high unemployment, subdued credit growthand large private and public debt. Inflation will continue tobe below the European Central Bank’s 2% target: disinfla-tionary pressures must be watched carefully in 2014, sincethey have the potential, if they last too long, to hold back therecovery, to endanger debt sustainability and to impact ad-versely on corporate profitability. In addition, ability to addressfinancial stress will be a key issue and the reform progress isstill a big challenge for the sustainability of the area.

JapanEconomic growth in Japan will remain relatively sound al-though it is set to slow slightly in the coming years (+1.6% in2014 and +1.0% in 2015) mainly held back by weak wagegrowth and slow progress in relation to the structural reformagenda (excessive debt issues are still to be addressed).Some uncertainties about the sustainability of Abenomicsmay emerge in 2014. As public finances have deterioratedmarkedly, steps towards fiscal consolidation are alreadyscheduled for this year (including a 3pps increase in the salestax effective in April 2014). However, the accommodativemonetary policy is expected to continue in order to boostprices and activity. The implementation of structural reforms(mainly regarding labour market flexibility, competitivenessand international trade) will be key for maintaining growthon a positive trend.

substantial challenges foremerging countries in thecoming years Economic activity in emerging markets is expected to growat a moderate pace. 2013 highlighted their vulnerabilities,which need to be monitored further in 2014, especially con-cerning their high external imbalances that, for someeconomies, are significantly challenging to finance. As illus-trated by the concerns sparked during the summer of 2013(including acceleration in capital outflows as a result of ex-pectations of a slowdown in Fed quantitative easing pro-gramme), managing a (progressive) exit from easy moneywill be a major issue. Even so, we think that most of theemerging economies have the ability to handle externalshocks: the key solution lies to a large extent in the policytoolbox now available. The second main concern in the com-ing years is related to a slower growth momentum comparedwith the pre-crisis period. China’s economic model trans-formation is central to concerns as the country’s levels ofeconomic activity contribute significantly to both regionaland global GDP growth. Nevertheless, we think that a sus-tainable and better-balanced growth model is in sight, withrobust intra-regional trade acting as a cushion. 2014 willtherefore be full of challenges for emerging economies: frag-ile fundamentals and external vulnerabilities to manage,coupled with imminent elections.

Emerging AsiaReal GDP growth will stabilise at a decent pace, +6.1% in 2014and +6.2% in 2015, reflecting robust domestic demand andbetter export prospects for the region. Real GDP growth inChina is expected to slow only slightly, to +7.5% and +7.3% in

▶

+1.3 %GDP growthin the eurozonein 2015

GDP growth, annual change, in %

Sources: IHS Global Insight, Euler Hermes forecasts* Weighs in global GDP at market price, 2012

weights* 2012 2013 2014 2015

woRld Gdp GRowth 100 2.5 2.3 3.1 3.3

advanced economies 62 1.5 1.2 2.2 2.3

emerging economies 38 4.3 4.1 4.6 4.8

north america 25 2.7 1.8 2.9 3.1

United States 23 2.8 1.8 3.0 3.2

Canada 3 1.7 1.8 2.6 2.6

latin america 8 2.6 2.6 3.1 3.5

Brazil 3 0.9 2.4 2.5 2.9

western europe 23 -0.3 0.0 1.2 1.6

United Kingdom 3 0.3 1.8 2.3 2.5

Sweden 1 1.3 0.9 2.3 3.2

eurozone members 17 -0.6 -0.5 0.9 1.3

Germany 5 0.9 0.5 1.6 1.7

France 4 0.0 0.2 0.6 1.2

Italy 3 -2.6 -1.9 0.3 0.8

Spain 2 -1.6 -1.3 0.5 1.0

Netherlends 1 -1.3 -1.1 0.8 1.3

Greece 0 -6.4 -3.8 -0.2 0.5

Ireland 0 0.1 0.1 1.4 1.5

Portugal 0 -3.2 -1.6 0.5 1.0

central and eastern europe 6 2.1 1.7 2.7 2.9

Russia 3 3.4 1.5 3.0 3.1

Turkey 1 2.2 4.0 4.0 4.2

Poland 1 1.9 1.2 2.2 2.4

asia 29 4.7 4.7 4.8 4.7

China 11 7.7 7.6 7.5 7.3

Japan 8 1.9 1.9 1.6 1.0

India 3 3.2 4.4 5.3 5.8

oceania 2 3.5 2.3 2.9 3.3

Australia 2 3.6 2.3 2.9 3.3

middle east 4 3.2 2.4 3.7 4.3

Saudi Arabia 1 5.0 4.0 4.5 5.0

United Arab Emirates 1 4.4 3.5 4.0 4,0

africa 2 5.8 4.0 4.9 5.1

South Africa 1 2.5 2.1 3.5 4.0

Morocco 0 2.7 4.5 4.5 5.0


7

+3.5 %GDP growthin Latin Americain 2015

Mexico is expected to accelerate on the back of better con-fidence and the recovery in the United States - its main trad-ing partner - the risks to the general scenario remain skewedon the downside for several countries (less favourable fi-nancing conditions, Fed tapering, decrease in global com-modity prices and slowdown in Chinese demand). Brazil, Ar-gentina and Venezuela remain the most exposed economiesin the region. Brazil will continue to face challenges relatedto relatively high inflation and tightened monetary policy,even if the economy is set to benefit from the World Cup in2014. Argentina and Venezuela will have to deal with deepmacroeconomic weaknesses.

Africa and the Middle EastAfter several years of political turmoil and economic crisis,Africa and the Middle East are expected to gain momentum,but slowly and, above all, with significant uncertainties (+4.9%in 2014 and +5.1% in 2015 for Africa and +3.7% and +4.3%,respectively, for the Middle East). Non-hydrocarbon growthand large financial surpluses will remain robust in most oil-exporting countries, especially in the GCC. In contrast, thepolitical situation remains highly volatile and economic risksare still largely weighted to the downside for oil-importingcountries: high vulnerability to oil prices, demand and outputchanges, challenging political transitions and potential forcontagion from conflicts. In 2014, we expect the politicaltransition in Egypt to move forward but it will remain fragile,with significant potential for social unrest and disruption tocommercial activity. We do not expect that sanctions againstIran will be lifted significantly in H1 2014 and the economyis likely to continue to struggle. However, signs of rapproche-ment between Iran and the international community havethe potential to improve regional dynamics.

2014 and 2015, respectively, as the economic drivers are pro-jected to change smoothly and become more consumption-based. The regional growth engine is set to rebalance in favourof the other regional heavyweights (such as India andMalaysia) and also of small economies thanks to a shift inproduction to neighbor countries (Vietnam, Laos). Politicalturmoil in Thailand and elections in Indonesia and India willhave to be watched in 2014 for potential new policy directions.

Emerging EuropeActivity is set to accelerate in Emerging Europe, with GDP ex-pected to expand by +2.7% in 2014 and +2.9% in 2015, takingadvantage of the improved external economic environment(especially in the eurozone) and at the same time under-pinned by stronger domestic demand. However, the regionwill remain marked by a growing divergence among coun-tries. Russia is not expected to recover to its pre-crisis trendas real wage growth has moderated and benefits from thecommodity-based growth model are stagnating. In Turkey,future activity will also have to be monitored, given the coun-try’s weak external financial conditions and potential for po-litical turmoil. Ukraine is still a high risk, due to weak macro-economic fundamentals and, additionally, political and socialfragilities. Moreover, external liquidity and public debt to GDPratios remain a concern in Croatia, Serbia and Slovenia.

Latin AmericaWe forecast real GDP growth will gain some momentumbut at a very moderate pace, +3.1% in 2014 and +3.5% in2015, mostly driven by the strengthening in North America’seconomy and a robust domestic demand. However, the pos-itive trend also masks deep vulnerabilities. While activity in

Looking for Reconnection?The world at a crossroad for the next few years...

Source : Euler Hermes


8

eight changes incountry risk ratings4th quarter 2013:seven downward revisions and oneupward revision

country RiskOutlook

2013 Q4

macRoeconomic ReseaRch and countRY Risk team

7downwardrevisions

bahrain

Economic outlook for GDPgrowth improved in the short-term but social and sectariantensions remain evident and posedownside risks to the outlook.

b3 b2ecuador

Public finances and externaldebt have improved andstabilized.

d4 c3

morocco

Rebound from 2012 droughtnow firmly embedded in data.

b2 b1

medium termrisk:the scale comprises 6 levels :aa represents the lowest risk, d the highest.

short termrisk :the scale comprises 4 levels :1 represents the lowest risk, 4 the highest.


9

thailand

Positive fundamentalsdampened by ongoing politicaltensions.

b1 b2

1upwardrevision

lithuania

Since 2009 the economicfundamentals improved andthe economy has reboundedstrongly.

c3 b2

hungary

Although the economy is stillvulnerable to external shocksthere are tentative signs ofimproving fundamentals.

c4 c3

latvia

Macroeconomic fundamentalshave strengthened substantiallysince the crisis while theadoption of the euro in January2014 is seen as a positive.

c3 bb1

Russia

Despite a slowdown of GDPgrowth in 2013, macroeconomicfundamentals will remain strongin the next few years.

c3 b2


10

stable growth may be goodenoughThe end of 2013 was a turningpoint for the Chinese economy asthe leadership started to set themilestones for future growth. In-deed, two key events took place inQ4: (i) the third Plenum meetingof the 18th Party Congress (mid-November), which set a compre-hensive reform agenda to enhancemedium-term growth, and (ii) theCentral Economic Work Confer-ence (CEWC), which set the keyeconomic policy targets for 2014.The Chinese authorities confirmedtheir willingness to shift towardsmore inclusive and sustainablegrowth, less reliant on exports. Ac-cording to the CEWC statement,they will support “appropriategrowth” and maintain “proactivefiscal” and prudent monetary “poli-cies”. Economic transformation isexpected to continue in a steppedand measured way. GDP growthwill probably slow from +7.6% in2013 to +7.5% in 2014 and to+7.3% in 2015. Economic growthis likely to be more consumption-based, supported by rising incomes

and employment. Investmentgrowth is likely to decelerate (anannual average +5.5% in 2014 and2015, compared with +12% be-tween 2000 and 2012) in line withthe slowdown in exports, but re-main at high level driven by a risein infrastructure projects as part ofthe urbanisation process.

credit and Financing: finallyaiming at qualityOn the financing side, majorchanges are in the pipeline. Accord-ing to the “Third Plenum blueprint”,the role of the private sector in thefinancial system will be enhancedas markets are expected to get “adecisive” role in resource allocation.This contrasts with the previousmodel for financing that consid-ered markets as “basic” method ofdistributing resources. Moreover,the financial sector will be openedfurther to include acceleration ininterest rate liberalisation and theconvertibility of the RMB capital ac-count. The latter is consistent withthe objective of making the RMB aglobal currency for trade and inter-national reserves. From a domesticpoint of view, consumer credit maybe more targeted to limit imbal-ances and reduce overcapacitiesbut also to contain non-standardfinancing growth (“shadow bank-ing”). Indeed, while total social fi-nancing (a broad measure ofcredit) grew by 15% y/y in Novem-ber 2013 (from 23% in the corre-sponding period of 2012), the ma-jor part of the non-standardfinancing (trust and entrustedloans), increased by 90% (from 71%in 2012). Although there is no clear

strategy to fight shadow bankingat this stage, some milestones wereset, especially through (i) financialregulation (China Banking Regula-tory Commission supervision) andmonetary policy (a more cautiousstance) and (ii) also by the com-mitment made by the authoritiesto keep local government debt (akey driver) under control.

Regional trade: while chinatransforms its business model,south east asia finds newgrowth engines The Asia-Pacific region is projectedto record solid growth, but at aslower rate than the past decade,at +4.6% in 2014 and +4.6% in2015, in line with China’s rebalanc-ing. Imports from China will con-tinue to fuel growth in the regionin 2014 (+3.8%) and 2015 (+4%),but at lower pace than before(+14% between 2000-12) as re-ex-porting activities are projected toease. As a result, main trade part-ners, notably south Asian countriesare planning to encourage the de-velopment of new growth engines,notably through infrastructure in-vestment (all ASEAN countries, forexample), development of morevalue-added industries (includingIndonesia with nickel ore) andwage increases (Malaysia, Thailandand Indonesia raised their mini-mum wages in 2013) to boost do-mestic demand and cope with theChinese transition.

mahamoud islam

the asia pacific region ison the verge of a newcycle or, as eh is calling it,the 3s-cycle: “solid,sustainable but slower”

{the region willcontinue to contributerobustly to world Gdpgrowth (at a marked 50% to60%) with five distinctclusters. These consist of“The OECDs” (Japan andSouth Korea); Greater China(China and its hubs); the“ASEAN-5”; South Asia (Indiaand its neighbours); andOceania (Australia and NewZealand).

{While the Asia Pacificregion will remain theworld’s economic driver andChina its main growthengine, asia will be inrelatively low growthmode (at +4.7% per year)compared with the previousdecade (+5%). However,this growth will be moresustainable, with resilientintra-regional trade actingas a cushion.

Game changer #1: China’s transformation will be under control

0 5 10 15 20 25 30 35

2013e

2000

India

Singapore

Vietnam

Indonesia

Thailand

Philippines

Malaysia

Japan

South Korea

Australia

Export dependency to ChinaExports to China, % of total exports


0

1,000

2,000

3,000

4,000

5,000

131211100908

Trust and entrusted loansBillions RMB


11


limited impact of the Fed taper-ing except perhaps for thehousing marketMost economic data has turnedsomewhat more positive in the pastfew months. As a result the Fed an-nounced tapering of its QE pro-gram, with expectations that it willterminate by the end of 2014. Butthe Fed will still be buying securitiesand adding to already massive ex-cess reserves, so tapering is nottightening. In addition the Fed willkeep short term rates at 0% through2015 or later. Therefore monetarypolicy remains very loose and is ex-pected to contribute to growth inmost sectors. As QE tapers, longterm rates will likely rise, makinglending more profitable which willexpand credit more rapidly, boost-ing the entire economy. Housinghowever has been derailed some-what because of rising mortgagerates, but rising prices and low in-ventory suggest the rebound willmost likely continue.

managing short-term politicalturmoilFiscal policy uncertainty has beenreduced somewhat. Congress ap-proved the first budget in fouryears, averting a government shut-down, raising revenue, reducingautomatic budget cuts, and provid-ing a boost to GDP forecasts. How-ever the debt ceiling issue will ariseagain in February, and Republicansmay use the opportunity to de-mand further spending cuts anddebt reduction. More political bat-tles may result from immigration

reform later this year. The roll-outof Obamacare has created signifi-cant uncertainty as private healthinsurance has suddenly been can-celled for millions of Americans,and it’s unclear if the new programwill be able to provide the coveragepromised.

policy-mix = energy x energyThe United States energy revolutionwill continue as new reserves ofshale gas and crude oil continue toflood the United States market withcheap energy. Currently WTI crudein the United States sells at a 13%discount to the global Brent price.While natural gas has recently beenbid up due to cold weather to$4/mmbtu, it’s still very cheapcompared to $10-$15 for much ofthe industrialized world. As UnitedStates energy production expands,the United States is importing lesscrude and exporting more refinedproducts, closing the petroleumtrade gap 22% or $4.3bn in Novem-

ber, contributing to the lowest tradegap in four years. Cheap energy isboosting manufacturing now, in-cluding advances in natural gaspowered autos and trains, and ifenergy export restrictions werelifted, it could provide a significantboost to the entire economy.

dan noRth

both the united statesand canadian economiesare expected to seemodest improvement in2014

{in the united states,fiscal uncertainty has eased,the labor market has shownsubstantial signs ofimprovement in the pastfew months, andexpectations of continuedstrength in manufacturing,autos, and housing are likelyto boost the economy to a3% growth rate in 2014compared to 1.8% in 2013.

{canada is likely toexperience increaseddemand for its exports asglobal growth accelerates,particularly in the UnitedStates In addition, lowinflation is pushing loosemonetary policy which islikely to weaken theCanadian dollar, furtherboosting the critical exportsector and driving GDPgrowth to 2.6% in 2014compared to 1.8% in 2013.

Game changer #2: The United States will re-industrializewith or without easy money

+3.0%GDP growth in the United States

in 2014

-1

0

1

2

3

4

2012 2013f 2014f

Net exports

Stocks

Investment

Public spending

Consumer spending

+2.8%

+1.8%

+3.0%

US GDP growth and components


1

2

3

4

5

131211100908070605

United States long-term bond interest rates

Sources: Bloomberg, Euler Hermes


12

First round of rebalancing broughta mechanical recoverySince the crisis, internal imbalancesbetween the eurozone countrieshave reduced significantly throughconsistent reductions in current ac-count deficits (more than 10% ofGDP in Greece, Portugal and Spain).This was mainly due to improve-ments in trade balances on theback of weaker imports, but also toa pick-up in exports as a result ofrestored competitiveness. In thisregard, wage adjustments (notablyin Spain, Greece and Portugal) andlarge-scale layoffs have allowedmarked improvements in cost-competitiveness. Further, fiscalconsolidation reduced significantlypublic refinancing needs. Goingforward, salvation is expected fromexports of countries that adjustedthe most and benefit from a robustindustrial base, namely Spain, Por-tugal and, to a lesser extent, Italy.The rebalancing process will also

be supported by Germany wherehouseholds will start to be an im-portant driver of GDP growth as aresult of supportive public policies(including installment of a mini-mum wage and additional publicspending, including pensions). Thiswill support a pick-up in importgrowth in Germany and thereforeresult in a reduction in the still-ele-vated current account surplus.

ability to reform will differenti-ate the good from the bad Greece, Spain, Portugal and, to alesser extent, Italy have been theeurozone countries that have re-sponded positively to a majority ofthe OECD recommendations interms of structural reforms (includ-ing action on labour market rigidity,regulatory barriers to competitionand tax evasion). While Spain be-gan to reform its labour market in2010, Italy implemented its firstmeasures only in mid-2012. Thisdelay is reflected in relative unitlabour cost adjustments (-10% inSpain since 2010, compared with+1% in Italy) and therefore in amore subdued export performanceas the structure of Italian exports,although among the most diversein the world, remains highly ori-ented towards medium rangeproducts, which are very labour in-tensive. In contrast, Germany, theEuropean leader in terms of high-tech exports, started to implementa strategy towards a ‘smart indus-try’ by 2020 aiming to allow last-minute changes to production, re-sponding flexibly to disruptions,solving energy and resource effi-ciency issues and enabling techno-logical transfers to SMEs. This is ex-pected to strengthen further

Germany’s export competitivenessand boost industrial performance.In contrast, policy action remainslimited in France where labourmarket rigidity and the tax burdenremain very high and act as a dragon competitiveness. In addition, thefiscal environment in France is oneof the least business-friendly withinthe region given its complexity, itsvolatility and its high tax rates.

Financing the recovery will bekeyOne of the main issues for the eu-rozone during the crisis has beenthe credit crunch in southern Eu-ropean countries. Credit to firms isalso contracting in countries suchas Germany and France (althoughat a moderate pace) due to weakdemand and a reluctance of firmsto invest. Taking into account thefact that two thirds of corporatefunding in the eurozone comesfrom banks it is crucial to have acommon strategy to restore creditchannels and therefore investment.In this regard, several options lieahead: 1/ new ECB VLTRO similarto the BoE’s Funding for LendingScheme stimulating bank lendingto the real economy; 2/ creation ofstructures able to help corporatesfinance more on the bond markets;3/ enhancement of credit insur-ance direct financing of corporatesand 4/ strengthening of the secu-ritisation of existing and new cor-porate loans and support for ven-ture capital through mutual effortsfrom European institutions. In ad-dition to all this, an increase in R&Dspending, a common energy policyand a lower EUR would be support-ive of an increase in investment andsustained economic growth.�

ana boata

2014 will be the ecb’syear

{selective andconditional liquidity(VLTRO similar to the BoE’sFunding for LendingScheme) in H1 2014.

{ecb asset QualityReview (AQR) results in H22014.

{the single supervisorymechanism (SSM) to befully in place in November2014.

Game changer #3: The Eurozone must keep its eye on the ball, but the ball is rolling

+0.9%GDP growth in the eurozone

in 2014

-20

-15

-10

-5

0

5

10

15

20

25

30

35

PortugalFranceItalyGermanySpain

13121110090807060504

Credit to non financial corporationsYear-on-year change, in %

Sources: Bloomberg, Euler Hermes

Euler Hermes Bulletin économique N° 1189-1190 | Conjoncture, risques et défaillances

1313

Yellen: a musketeer having aglobal impactDespite Fed tapering to start in Jan-uary, United States monetary policywill remain very accommodativethrough 2014: Chairman BenBernanke will be succeeded byJanet Yellen but this is unlikely tolead to any major change in thepolicy stance. Tapering is expectedto be very progressive in order notto threaten the recovery and toavoid a strongly negative marketreaction; the asset purchase pro-gramme is expected to end in Fall2014. The Fed has successfullyadapted its forward guidance re-garding the policy rate (maintain-ing the status quo even when un-employment reaches 6.5%,especially if inflation remains underthe 2% target). Equity markets re-acted positively to this announce-ment, suggesting the decision waswell anticipated. If the recovery ofthe United Stateseconomy remainson track, stronger uncertainties willweigh on emerging markets, whichcould suffer from renewed capitaloutflows.

carney and draghi: two muske-teers focusing on forward guidanceand (targeted) liquidityIn the United Kingdom, GovernorMark Carney established a very ex-plicit forward guidance, explainingthat the Bank of England’s mone-tary policy will remain accom-modative as long as the rate of un-employment exceeds 7%. In thisregard, monetary policy should re-main accommodative through2014 (continuation of the assetpurchase programme and key in-terest rate at 0.5%). The majorchange will come from the Fundingfor Lending Scheme (extended un-til January 2015) which will be re-focused to support only businesslending as credit conditions forhouseholds have improved sub-stantially. At the ECB, PresidentMario Draghi also strengthenedforward guidance (though to alesser extent) by specifying thatmonetary policy will remain ac-commodative as long as necessary.Given the fall in inflation, the ECBdecided to cut its key interest rateby 0.25bps (to 0.25%) last Novem-ber. The fragile recovery of the eu-rozone, as well as the outlook forprices, suggests that further actionsmay be taken in H1 2014. The ECBis likely to use conventional meas-ures in the first instance: anotherkey rate cut and/or a negative de-posit rate are possible if inflationrates weaken further while a newVLTRO is likely if the ECB AssetQuality Review and EBA stress testsresult in increased market stress. Apotential new LTRO would be in-spired by the BoE’s Funding forLending Scheme: targeted liquidityto support SMEs. Other optionswithin the ECB toolkit include sov-ereign debt purchases on the sec-ondary bond market (SMP, OMT)

and/or purchases of private sectorsecurities (ABS and private loans).

abenomics: arrows or swordsfor d’artagnan Prime Minister Shinzo Abe basedJapan’s economic programme onthree main actions: a very accom-modative monetary policy, anexpansionary fiscal policy andstructural reforms. In this regard,the Bank of Japan will continue itsquantitative easing (doubling themonetary base by 2015) thoughthere are uncertainties on whetherthe increased liquidity will remainin the country, given the still fragilerecovery. The government hasalready announced an additionalfiscal stimulus (JPY5 billion) toboost economic activity but thedeteriorating public finances makesuch an expansionary policyunsustainable. Abe has alreadytaken a first step towards fiscalconsolidation, through a 3%increase in the sales tax rate, effec-tive in April 2014, but furthermeasures will be necessary. Withregard to the structural reformagenda, Abe’s governmentannounced its intention toimprove labour market flexibility,to boost high value-added indus-tries and to support internationaltrade; but for now, there is nothingconcrete. However, these reformswill determine mid-term growth,as the current economic model,although effective in the short-term, is not sustainable.

clémentine cazalets

central banks’ support ofthe recovery will bedetermining

{united states:progressive tapering andimproved forward guidancenot likely to endanger therecovery.

{united kingdom andeurozone: targeted liquidityto help the recovery.

{Japan: accommodativemonetary policy to boostboth prices and activity.

Game changer #4: The monetary musketeersand Japan’s d’Artagnan

Fall2014expected end ofthe Fedquantitative easingprogramme

0

1

2

3

4

5

6

7

8

Net exports

Stocks

Investment

Public Spending

Consumer Spending

GDP

12-1512-1412-1312-12-1

Consumption peak before sale tax hike

Public spending-led growth

GDP growth and contributions to growth in Japansince Abenomics introduction, in %


0

5

10

15

20

25

30

35

0

10

20

30

40

50

60

70BoE BoJ - rhsECBFed

1413121110090807

forecasts

Total Central Bank balance sheets% of GDP


Le Bulletin Économique N° 1202-1203 | novembre-décembre 2013 | Conjoncture et risques économiques Euler Hermes

14

supply and demand, main driversfor disinflation in the advancedeconomiesInflation in developed economieshas gradually moderated sinceearly 2012. In the space of twoyears, the inflation rate in theUnited States weakened from 3.0%in January 2012 to 1.2% in Novem-ber 2013, while it fell from 2.7% to0.8% in December 2013 in the eu-rozone. Japan is the exceptiongiven the change in monetary pol-icy of the central bank in early 2013.This disinflationary trend is mainlydue to weak demand and supplyon the back of record high unem-ployment rates, contracting (or de-celerating) wages, negative (orweak) credit growth, a gloomybusiness environment and overca-pacity in industry. Further, moder-ation in prices for raw materials andenergy has also been a drag on in-flation.

2014 will not be the year ofcommoditiesChina’s more moderate pace of ex-pansion and the less accommoda-tive monetary policy stance of theFed, triggering an appreciation ofthe dollar, increase the downsiderisks to commodity prices. Never-theless, upside risks remain on theback of structural factors: demo-graphic trends (for food-relatedcommodities), rising incomes,growing middle classes and indus-trialization/urbanization rates inthe emerging markets (for energyand metals). Supply side risksmainly from instability in the Mid-dle East and North Africa will alsoremain a key issue to monitor inthe coming years. We, however, ex-pect commodity prices to remainbroadly stable in 2014.

disinflationary pressures in theemu may affect the recovery Disinflation in the eurozone is nota big surprise. Rising unemploy-ment rates at record levels in south-ern European economies, leadingto sharp declines in real wages, and

the credit crunch, increased down-ward pressures on prices in thesecountries. Greece and Cyprus haveexperienced deflation sinceMarch/April 2013 when inflationrates turned negative, while pricesare moderating rapidly in Spain,Italy, Portugal and Ireland. The sit-uation is not as severe as in 2009and the ECB could act if deflation-ary pressures endanger the recov-ery or debt sustainability, notablyin countries with still large primarydeficits such as Spain (as higherreal interest rates will makedeleveraging more painful). Finally,downside pressures on prices couldendanger corporate profitability,which is already weak in France andItaly.

ana boata

Game changer #5: “It's the price, stupid!”- whendisinflation matters in the advanced economies

+0.8%Headline inflationin the eurozone in Dec. 2013

-3

-2

-1

0

1

2

3

4

5

6 United KingdomUnited StatesItalyFranceSpainGermany

13121110090807

Japan

Headline inflationYear-on-year, in %


20

30

40

50SpainItalyGermanyFrance

12111009080706050403020100

Profit share of non-financial corporationsin the EMUGross operating surplus/gross value added, in %

0

5

10

15

20

25

30

Latest point (Nov. 2013)

Pre-crisis average (2000-2007)

Spain Italy France Germany

Unemployment rate%



Euler Hermes Bulletin économique N° 1189-1190 | Conjoncture, risques et défaillances

15

latin america and emergingeurope: handling the collateraldamageIn Latin America, the announce-ment on 18 December 2013 of thestart of theUnited States Fed’s ta-pering in January 2014 has had lim-ited impact on financial markets sofar. Should downward pressure onnational currencies increase in H12014, EH expects reactive centralbank intervention to reduce any po-tential damage as happened duringthe emerging market sell-off inmid-2013. In Emerging Europe,most countries avoided that sell-off – as they had not attracted sub-stantial capital inflows in the previ-ous years – and should also remainunscathed by the tapering in 2014.The notable exception is Turkeywhere large short-term capital in-flows have financed high currentaccount deficits in recent years. Theindication of forthcoming Fed ta-pering caused a 13% depreciationof the TRY against a USD-EUR bas-ket in mid-2013 and another 6.5%decline at the turn of the year

2013/2014, when political turmoiladded to the already high vulnera-bility of financing flows. The CentralBank of Turkey has so far tried tostem depreciation pressures mainlythrough FX interventions, however,should downward pressure on theTRY continue, it may no longer beable to refrain from interest ratehikes.

mind the heterogeneityMost major countries in EmergingEurope were able to rebalance theireconomies after the Great Reces-sion in 2009, reflected in narrowingcurrent account deficits. Notableexceptions are Turkey, Serbia andUkraine which have posted externalshortfalls of more than 7% of GDPin 2013. However, the legacy of ear-lier large current account deficitshas left many countries in the re-gion with high annual external debtpayments falling due which, in2014, will exceed foreign exchangereserves in Ukraine, Turkey, Poland,Bulgaria, Hungary and Romania. Asa result, external liquidity risk re-mains a concern in Emerging Eu-rope. The overall situation is betterin Latin America where most majoreconomies have accumulated am-ple foreign exchange reserves thatare more than sufficient to covertheir annual external financingneeds. Even the current accountdeficits of Peru and Uruguay whichhave risen to around 5% of GDP in2013 appear unproblematic. Theexceptions are Argentina andVenezuela which have relativelylow foreign exchange reserves de-spite years of current account sur-pluses, but this is a result of adecade of economic mismanage-

ment and investor-unfriendly poli-cies that have left these countriesas high risk.

Restoring export marketsThe improving global economicenvironment will benefit the exportand thus growth performance inthe Latin America and EmergingEurope regions, especially the re-covery in the United States and theeurozone, their respective key ex-port markets. Assuming relativelystable commodity prices and sta-bilising demand from China, thebrighter outlook for the UnitedStates will support most LatinAmerican countries, especiallyMexico which ships around 80% ofits exports to its neighbour in thenorth. The outlook for EmergingEurope is somewhat more diverse.The eurozone recovery will im-prove the external demand picturefor the EU members in the regionand the Balkans, which sendaround 60% of its exports to the eu-rozone. Turkey should also benefiteven though the share of its exportsgoing to the eurozone has fallen to27% (39% for the EU28). Russia andUkraine will benefit less from theeurozone recovery as capacity bot-tlenecks in the commodity sectorscombined with stable commodityprices will constrain export growth.Substantial structural reforms areneeded to return to pre-crisisgrowth trends in these two coun-tries, but appear unlikely soon.

manFRed stameR

Resilience to externalshocks has improvedoverall in latin americaand emerging europe, butthere is a growingdivergence on risks

{the impact of unitedstates Fed tapering will belimited, except for Turkey.

{Most countries haverebalanced their economiespost-crisis, but externalliquidity risk remains akey concern for Ukraine,Turkey, Argentina andVenezuela.

{in 2014, the latinamerica and emergingeurope regions will benefitfrom the recovery in theUnited States and theeurozone.

Game changer #6: Periphery countries - dodging the liquidity crunch, piggy backing the recovery

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5Slovenia

Slovak RepublicRussia

HungaryBulgariaCroatia

LithuaniaEstoniaPoland

LatviaCzech Republic

RomaniaTurkeySerbia

Ukraine

Current account balance% of GDP


90

95

100

105

110

115

120ChileColombiaMexicoBrazil

122013

11100908070605040302012013

First hintof tapering

Exchange ratesLCU/USD, base 100 = 01/01/2013



16

what is the risk? who is most atrisk?Although the FED in the UnitedStates announced that tapering willstart in January 2014, concernsabout emerging markets re-emerged in the latter part of 2013.In our September issue, EH showedthat, while some emergingeconomies have weak fundamen-tals to handle external shocks, therisks are broadly contained as theseeconomies have enough policy op-tions and reserves to cope with aliquidity crisis. The vulnerability ofa country depends on two risk cat-egories: cyclical risk and liquidityrisk (structural vulnerability). Thefirst encompasses short-termweaknesses: (i) risks overhangingexchange rates and prices, (ii) riskthrough financial values (financialwealth and stock prices) and (iii)dependence on the energy sector.The second category concerns theeconomy’s capacity to weather aliquidity crisis. It can be measuredpartly by the state of external ac-counts (current accounts, debt andforeign reserves) and trends incredit to the private sector. Withregard to these two components,EH identifies eight countries ashighly vulnerable, facing high cycli-cal risk and structural weaknesses:

Turkey, Argentina, Venezuela, SouthAfrica, Morocco, Brazil, Indonesiaand India. In an environment ofUnited States tapering in 2014,these countries are likely to facetough headwinds (especially pres-sures on their currencies) in theshort term.

policy toolbox and responsive-ness is pivotal to managefinancing gapsPolicy toolboxes will be the key tocircumvent an economic down-turn. In the context of financialstress, monetary policy makers willneed to show their willingness todefend financial stability and pre-vent their economies registering fi-nancing gaps due to capital out-flow. Last summer, there was someevidence of the responsiveness oflarge emerging countries’ centralbanks to keep their currencies atsafe levels, using various tools (in-cluding increasing interest rates inIndonesia and Brazil and foreignexchange rate intervention in Thai-land). Fiscal policy matters too. Itsdirect impact on GDP growthmakes it an ideal tool for policymakers during challenging periods.There was a good example of useof a stimulus package during theGlobal Financial Crisis of 2009when all the large economies (ad-vanced and emerging) increasedpublic expenditure to boost eco-nomic activity. This was also thecase post-GFC for economies suchas the United States (throughmeasures including the EmergencyUnemployment Compensation),Japan (the second directive underAbenomics) and China and Russia(infrastructure programmes).However, responsive policies imply

good management of public fi-nances and a strong commitmentfrom policy makers. Indeed, re-sponsiveness and the efficiency ofthe response depend on the roomto manoeuvre (sound public fi-nances and ability to implementcountercyclical policies) and thecredibility of the authorities.Emerging economies sufferedfrom these problems for manyyears, implementing procyclicalpolicies and effectiveness of meas-ures dampened by previous trackrecords of debt default and per-ceptions of corruption. More re-cently, emerging economies, ingeneral, have improved their fiscalmanagement. Over the pastdecade, about one-third of emerg-ing markets switched to counter-cyclical fiscal policies1 (notably inMalaysia and Chile) and some ofthem have created financial bufferslarge enough to cope with externalshocks (including Saudi Arabia andThailand).

Residual risk and frictionsinclude exchange risk for corpo-ratesReduced macro-risks as a result ofstronger financial fundamentalsand responsive policies, does notnecessarily mean that micro-risksare correspondingly lower. Highresidual risk, particularly as feedthrough from exchange ratemovements is expected in theshort term. Corporates, especiallythe smallest and those exposed toexternal trade, are highly sensitiveto currency fluctuations. As ex-change rate risks will probably in-crease, these companies may havechallenging times in the short term.Non-payment risk and insolvenciesare likely to rise if the authoritiesfail to keep their currencies undercontrol. The sectors that will needmonitoring are probably construc-tion, which will be hampered byhigher input prices, and IT becauseof its high degree of dependenceon imports of technological goodsfrom the emerging countries.

mahamoud islam

Game changer #7: Emerging markets, fragility is a policy thing

Eightcountries highlyvulnerable:Turkey, Argentina,Venezuela, SouthAfrica, Morocco,Brazil, Indonesia,India

1 Frankel, Jeffrey, CarlosVégh, and Guillermo Vuletin(2011), “On Graduationfrom Procyclicality”,University of Maryland

Russia

Turkey

Poland HungaryRomania

Croatia

China

India

South Korea

Indonesia

Malaysia

ThailandPhilippines

Vietnam

Brazil

Argentina

VenezuelaMexico

Colombia

Chile

Saudi ArabiaUnited Arab Emirates

Morocco

South Africa

Kenya

Nigeria

30 35 40 45 50 55 60 65 70 75 80 85 90 95

30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cycli

cal R

isk (

0-10

0 sc

ore,

0=h

ighe

st ri

sk, 1

00=l

owes

t risk

)

Liquidity risk (0-100 score, 0=highest risk, 100=lowest risk)

CzechRep.

Liquidity and cyclical risks in emerging countries


17


mena will remain a region besetby political and social changesWhile political risks will manifestthemselves around the world in2014, including tensions in CentralAsia and the Caucasus, North Koreaand, perhaps, Bangladesh andVenezuela, the region likely to ex-perience the most widespread po-litical and social upheaval and con-flict is likely to be the Middle Eastand North Africa. To an extent,some of this represents ongoingrisks, including fragile political tran-sitions in North Africa (Egypt, Libyaand Tunisia) and Yemen, civil warin Syria with contagion effects inneighbouring countries (includingLebanon), unresolved sectarian is-sues in Bahrain, high security alertsin Iraq and a continuing stand-offbetween Israel and the authoritiesin the Palestinian territories. More-over, overlaying all this are concernsrelating to Iran’s nuclear programand to that country’s influences, di-rect and indirect, on shifting re-gional power dynamics. In 2014, EHexpects Iran will remain part of the

centre stage of international diplo-macy. Tensions between Shia andSunni Moslem communities mayintensify in 2014 and the impactand extent of the Arab Spring arefar from over. Further south, the Sa-hel region and central Africa, withill-defined and porous borders areareas of continuing high risk, in-cluding Mali and the Central AfricanRepublic but also involving sectar-ian divides in northern Nigeria andongoing conflict in the Sudans.

a busy political calendar in thenext 18 monthsIn 2014 and H1 2015, some poten-tially significant elections arescheduled to take place. These en-compass some of the BRICS (Brazil,India and South Africa) and otherlarge emerging economies (includ-ing Indonesia, Turkey and Ukraine)but also the United States (Con-gressional) and the United King-dom (a referendum in Scotlandthat may be the vanguard to a par-tial break-up of the United King-dom). The ANC government islikely to win a new mandate inSouth Africa but its support base iseroding and the political landscapeis now changing, with associatedrisks increasing. In India, which hasan electoral track record of unseat-ing incumbent governments, achange in regime appears possible,with a more pro-business admin-istration taking over, but one thatmay herald greater ethnic unrest.

institutions and societal risk tobe closely monitoredThe strength of political, civil, mon-etary and economic institutions willbe critical in limiting risks in 2014.

A strong and stable political baseforms a good bedrock for cultivat-ing external investor and tradinginterests (another reason to watchclosely 2014’s unfolding electiontimetable). The Arab Spring pro-vided firm evidence of the need forpoliticians and other leaders to takeaccount of changing dynamics insociety and how people now com-municate. It had been evident forsome time that social pressureswere building in MENA because ofthe lack of political enfranchise-ment and freedom of expression,combined with high unemploy-ment rates. Modern communica-tion systems, including widespreadavailability of mobile telephony,were used to harness this pressure,which was finally released in Tunisiain 2011 and quickly spread. How-ever, the ability to mobilise opposi-tion forces and demonstrators us-ing modern communicationtechniques has been seen else-where, including the eurozone andmay emerge as political challengeselsewhere in 2014. Political risk isever-present and, in addition to on-going conflicts and tensions, willemerge in new forms and areas in2014. EH expects further evidencethis year of attempts by some gov-ernments to seize increased controlof natural resources. Sectarian,tribal and religious conflicts willtake place around the world. At-tempts will be made to furtherstrengthen political governanceand institutional supervision, butwill be challenging. Overall, deci-sion-making in relation to commer-cial opportunities should take ac-count of political risk factors and,in this respect, information is key.

andRew atkinson

2014 will bring more ofthe same political risks,but expect some surprises

{the middle east andnorth africa will remain aregion beset by political andsocial changes and shiftingdynamics.

{a busy electoralschedule in 2014 and H12015 is likely to providereminders of the ficklenature of electorates, withsome regime changes.

{political and civilinstitutions requirestrengthening in 2014. Insome areas, including Africa,improved governance canprovide an environment toincrease investment inflowsand GDP growth. In others,including the eurozone,improvements ininstitutional frameworks arerequired to foster economic,financial and integraldevelopment.

Game changer #8: Old and newpolitical risk in 2014

Elections in key emerging countries in 2014

Despite an improved outlook, economic risksremain weighted towards the downside in MENA

Source: Euler Hermes



18

deepening regional blocs:asean economic community(aec), pacific alliance and GccStrength through unity; it seemsthat a large number of countriesfind the old adage more and moreappealing. The AEC aims at creatinga single market and productionbase for an equitable economic de-velopment in a competitive andworld-integrated region. The tencountries have already succeededin tariff elimination but they are fa-cing difficulties in removing non-tariff barriers. A single regionalcommon market may be created in2015, with the target of zero importduties, which should help themembers to increase their compe-titiveness with China and India. Theinitial goal of the Pacific Alliance isto advance free trade with a “clearorientation towards Asia”. In late2013, the four members agreed toliberalise 92% of their exchanges ofgoods and services, and they arehoping to reach 99% within sevenyears. In addition to reducing tradebarriers, they have started to imple-ment other projects aiming at re-gional integration, including acommon stock exchange and jointembassies. The GCC countries arefacing more difficulties in forminga regional bloc. A common marketwas launched in 2008, removing allbarriers to intra-country invest-ment and trade in services. Howe-ver, for now the story ends here asthe customs union was breachedwhen Bahrain signed a free tradeagreement with theUnited Statesand the UAE and Oman have rejec-ted membership of a monetaryunion.

bridging continents: transatlanticagreement, pacific agreementThe Transatlantic agreement aimsat reinvigorating bilateral trade bet-ween theUnited States and the EU.As there is limited potential for tariffcuts, the main emphasis should bereductions in non-tariff barriers (in-cluding harmonisation of technicaland environmental regulations). Ifthe European Commission Presi-dent hopes to reach an agreementby late 2014, it is likely that negotia-tions will last a little longer. Toge-ther, the countries account for 40%of global trade and GDP and thisagreement could enable them tomake up some global market sharelost to emerging countries. The Pa-cific Agreement is a trade agree-ment under negotiation between12 countries, including the US,Chile, Japan and Malaysia. This arearepresents 40% of global GDP and26% of global trade. The agreementcould eliminate tariffs on goodsand services, reduce non-tariff bar-riers and harmonise regulations.However, even if negotiations arewell advanced, United States regu-lations could prevent swift imple-mentation as a majority vote ofsupport in the House of Represen-tatives and the Senate is required.

Removing supply chain barrierscould be six times more effec-tive than eliminating tariffsIn 2013, a World Bank report poin-ted out that reducing supply chainbarriers to trade could increase glo-bal GDP by +4.7% and global tradeby +15%. The report identifies fourmain obstacles: market access,border administration, telecom-munications and transportation in-frastructure and the businessenvironment. The main reasonwhy lowering supply chain barriers

could be so effective is because thegains would be more fairly distri-buted among countries than thegains from reducing tariffs. The ef-fect would be more important forsmaller businesses, as barriers forthem are harder to overcome. In itsEnabling Trade Index, the WorldBank identifies the “best” countriesas Singapore, Hong Kong and theNordics. This ranking could changeover time as the latest Doing Busi-ness report (one component of theEnabling Trade Index) underlinedthe fact that low-income economiesimproved the most in 2013 in termsof their business environments, par-ticularly some Sub-Saharan Africancountries.

clémentine cazalets

what if regional blocswere one country?

{pacific alliance (Chile,Colombia, Mexico and Peru)would be the 6th largesteconomy.

{asean (Brunei,Cambodia, Indonesia, Laos,Malaysia, Myanmar,Philippines, Singapore,Thailand and Vietnam)would be the 8th largesteconomy.

{Gcc (Bahrain, Kuwait,Oman, Qatar, Saudi Arabiaand UAE) would be the 14thlargest economy.

Game changer #9: Building blocks - a new form of protectionism

TransatlanticAgreement:

40%of global trade

Pacific Agreement:

26%of global trade

0

1,000

2,000

3,000

4,000

5,000

6,000

Spai

n

GCC

Indi

a

Braz

il

Pacif

ic Al

lianc

e

ASEA

N

Germ

any

Japa

n

GDPUSD bn - Trade unions and Benchmark countries


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Braz

il

Indi

a

Pacif

ic Al

lianc

e

Fran

ce

GCC

ASEA

N

Unite

d St

ates

Chin

a

Trade (exports + imports)USD bn - Trade unions and Benchmark countries


Game changer #10: Global rebalancing - don’t put the cart before the horse


19

Growing in syncRecent economic development hasshown how strongly emergingeconomies have caught up withadvanced economies and howgrowth paths between regionshave become more synchronised.Between 2001 and 2008, the con-tribution of emerging economiesto world GDP growth increasedfrom 36% of GDP growth in 2001to 98% in 2008, largely reflectingthe Chinese boom and strongcatch-up of other emergingeconomies (BRI and ECA). Duringthe financial crisis and up to 2012,emerging economies supportedglobal GDP growth (contributing60%). In 2014 and 2015, AE and EMare expected to grow in synch, (i)together on rise, (ii) contributingto growth at quasi-similar levels(55% to 2014 GDP growth for theemerging economies). In particu-lar, growth in emerging economiesshould ease to a more sustainablelevel on the back of rebalancing inChina, while growth in advancedeconomies is projected to acceler-ate. Meanwhile, living standardswill continue to improve in all mainregions. In the early 2000s only the

GCC countries and Asian dragons(Singapore, South Korea, HongKong and Taiwan) among theemerging economies were able tomatch the living standards of ad-vanced economies. Since then,some other countries have caughtup, particularly some in EmergingEurope, such as Slovenia and Slo-vakia). This process is likely to con-tinue in Asia and in Latin America,with countries such as Malaysia,Uruguay and Chile projected toreach living standard levels of theAE in the mid-term.

current account swingsEnhancing financial strength willbe crucial. One lesson that can bedrawn from past years is that ad-vanced economies are not immuneto external financial shocks, partic-ularly in relation to their debt sus-tainability. Indeed, vulnerabilitieshave increased through wideningcurrent account deficits and exter-nal debt levels, making them morefragile than emerging economiessuch as Malaysia. Weak public fi-nances were perhaps the main trig-ger of this deteriorating financialstrength. Restoring confidencethrough the improvement of finan-cial fundamentals will be the keyin the next few years to avoid newfinancial pressures. Fiscal consoli-dation in the eurozone was a startfor the countries most at risk in thatregion, with current accounts setto continue to improve (from -0.4%of GDP in 2013 to +0.3% in 2014for Greece and from -0.2% in 2013to +0.6% in 2014 for Portugal), buteconomic growth is needed to con-solidate these efforts.

politics vs. economicsConsolidating growth requiresstrong foundations. Structuraladjustments through reforms willbe key drivers for long-termgrowth. In the advancedeconomies, efforts will be concen-trated on competitiveness to boostexports, innovation to reinforcegrowth potential and also fiscalpolicy to avoid financing gaps andmaintenance of public debt atmanageable levels. For the emerg-ing economies, the process isunder way. The business environ-ment is improving in some butthere is still a long way to go asmany of the large emergingeconomies (including Brazil, Russiaand India) continue to be difficultmarkets for investors because oflegal barriers, administrative delaysand perceptions of corruption.Building strong infrastructuresshould be part of this process asthey are important engines fortrade. However, perhaps evenmore important in this process arepolitics and the regulatory environ-ment, with improvements inpolitical stability and the rule of lawkey factors in reassuring investorsand promoting corporate activity.This is all the more necessary sincepolitics and economics often workto differing timetables. Indeed,economic agents need reassur-ance about the outcome of theirinvestments and stable politicsand appropriate legal frameworksare therefore needed. Moreover,structural adjustment processestake time before benefits materi-alise, typically from 5 to 10 yearsdepending on the reforms imple-mented. For example, tradereforms as well as labour marketreforms could take at least fiveyears to have a durable effect ongrowth.

mahamoud islam

55%of world GDPgrowth to comefrom theemerging marketsin 2014-15

Germany France

Italy

Spain

United States

Japan

Brazil

Russia India

China

South Africa Mexico

Poland

Chile

Thailand Nigeria Malaysia

Australia

Peru

Morocco

0

20

40

60

80

100

120

140

160

180

200

-10 -5 0 5 10 15

Exte

rnal

deb

t

Current account balance

Vulnerableto external shocks

Resilient to external shocks

Current account and extern debt in 2014% of GDP


20


1

Business Insolvency Worldwide

Economic Outlookno. 1200-1201october-november 2013

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Economic Research

Patching things upFewer insolvencies, except in Europe

economic Researcheuler hermes Group

EconomicOutlookseries

Already issued:

no. 1183-1184 ◽ macroeconomic, Risk and insolvency outlook Too much time wasted saving time

no. 1185 ◽ Global sector outlook Economic sectors put to the test

no. 1186 ◽ macroeconomic, Risk and insolvency outlook In 2013, we take the same and start again

no. 1187 ◽ special Report The Reindustrialization of the United States

no. 1188 ◽ special Report The Reindustrialization of the United States

no. 1189-1190 ◽ macroeconomic, Risk and insolvency outlook World heads for sixth year of crisis: something the Maya did not forecast! !

no. 1191 ◽ Global sector outlook Now where did global demand go?

no. 1192 ◽ special Report Trade Routes: What has changed, what will change

no. 1193 ◽ macroeconomic, Risk and insolvency outlook Europe: still looking for a second wind

no. 1194 ◽ business insolvency worldwide Corporate insolvencies: the true nature of the Eurozone crisis

no. 1195-1196 ◽ macroeconomic, Risk and insolvency outlook The world at a crossroads

no. 1197 ◽ Global sector outlook Reconciling economic (dis)illusions and financial risks

no. 1198 ◽ special Report The Mediterranean: Turning the tide

no. 1199 ◽ macroeconomic and Risk outlook Half-baked recovery

no. 1200-1201 ◽ business insolvency worldwide Patching things up: Fewer insolvencies, except in Europe

no. 1202-1203 ◽ macroeconomic and Risk outlook Top Ten Game Changers in 2014 - Getting back in the game

To come:

no. 1204 ◽ Global sector outlook

Economic Outlookno.1198 August 2013

Special Reportwww.eulerhermes.com

The Mediterranean: Turning the tide

Economic Research

Macroeconomicand Country Risk Outlook

EconomicOutlook no. 1199September 2013

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Half-baked recovery

Economic Research


21

Back issues:◽ Italian companies benefic from exportsbut continue to face high non-payments inthe domestic market >November 14, 2013 (En) ◽ Cracks in the U.S. Housing Market?>November 5, 2013 (En)◽ Construction boom in Qatar, betweenrisk and opportunities >October 30, 2013(En) ◽ Russia, a promising land for Agrifood>October 18, 2013 (En)◽ Major overcapacity in the global steelindustry >October 10, 2013 (En, Fr)◽ Hungary : despite overall economicfragility, some sectors have retainedstrength >September 2013 (En)

◽ En France a fin juillet 2013, toujoursaucun signe d’amelioration du cote desdefaillances d’entreprises, bien aucontraire >August 29, 2013 (Fr)◽ China: Mini credit crunch for a megaeconomy? >August 19, 2013 (En, Fr)◽ The eurozone needs a credit policyt>July 31, 2013 (En, Fr)◽Transatlantic Free-Trade Agreement:More than just corn and foie gras?>July 1st, 2013 (En, Fr)◽ Europe: The scarring effects of youthunemployment >July 1st, 2013 (En, Fr)◽ United States : structural unemploy-ment as a long-term impediment togrowth >25 June 2013 (En)

◽ En France, la remontée desdéfaillances d’entreprises se diffuse à lagrande majorité du tissu économique>June 24, 2013 (Fr)◽ Défaillances : pourquoi cette crise est-elle différente de 2009 ? > 6 juin 2013 (Fr)◽ ‘Greecovery’: Is there enough light atthe end of the Greek tunnel > June 4, 2013(En)◽ Shale gas : One country’s meat isanother country’s poison? >May 29, 2013(En)◽ Insolvency forecast Germany :Several sectors at insolvency risk in 2013> May 29,2013 (De, En)

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Back issues:◽Bahrain > Last review: 2013-12-16◽Bolivia > Last review: 2013-12-16◽Czech Republic > Last review: 2013-12-16◽Dom. Republic > Last review: 2013-12-16◽Ecuador > Last review: 2013-12-16◽Hungary > Last review: 2013-12-16◽Iran > Last review: 2013-12-16◽Ivory Coast > Last review: 2013-12-16◽Latvia > Last review: 2013-12-16

◽Lithuania > Last review: 2013-12-16◽Morocco > Last review: 2013-12-16◽Russia > Last review: 2013-12-16◽Thailand > Last review: 2013-12-16◽El Salvador > Last review: 2013-12-16◽Ethiopia > Last review: 2013-12-16◽Gabon > Last review: 2013-12-16◽Honduras > Last review: 2013-12-16◽Iceland > Last review: 2013-12-16

◽Israel > Last review: 2013-12-16◽Laos > Last review: 2013-12-16◽Mali > Last review : 2013-12-1◽Paraguay > Last review: 2013-12-16◽Taiwan > Last review: 2013-12-16◽Trinidad and Tobago >Last review: 2013-12-16◽UAE > Last review: 2013-12-16◽Vietnam > Last review : 2013-12-16


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