Country watch list

country(ies) on negative watch list

Australia (A1)

Risk assessment 

Growth

Sustained growth but weaker performances from the non-mining sectors

After the slowdown in activity in 2011 (1.8%) following the devastating floods in late 2010 and early 2011, growth is expected to accelerate (2.7%) benefitting from a base effect and above all from the rebound of investment. Businesses in the mining (coal and iron ore), and energy (coal gas and natural gas) sectors are actually expected to speed up the realisation of big projects in the north of the country, estimated at 451 billion American dollars. Despite the expected slowdown in growth in Asian countries, mining and energy exports will continue to grow strongly. These performances nonetheless hide the difficulties being experienced by the manufacturing and tourism sectors because of the price-competitiveness disadvantages due to the appreciation of the Australian dollar. Downward pressures on the currency which have been observed since the second half of the year as a result of investors turning to the currencies of countries less dependent on raw materials were short-lived. Since the beginning of the year, the local currency has appreciated again. But unless the eurozone crisis intensifies, the dollar is expected to remain at a high level, which, in a context of sustained investment, will favour imports. Foreign trade will therefore continue to contribute negatively to growth and the current account balance will remain in deficit. 

Household confidence weakens

Household consumption continues to be the driving force behind growth but in 2012 it will remain below pre-crisis levels. The trend in the household confidence index is less positive despite the last December cut in the Royal Bank of Australia's key rate to 4.25%. This decision will alleviate the mortgage debt of households, most of which have taken out variable-rate loans. Discretionary spending, especially that linked with leisure, is being cut back as households prefer to pay down debts (150% of their disposable income -IDI-) and to continue to put money into precautionary savings (9.2% of disposable income against 3.1% in 2007). Investment in housing is likely to stagnate or slow slightly, despite the chronic shortage of housing in most major Australian cities. In this context, the prices which are already high should be pushed up further. 

Despite the healthy state of the economy, tax receipts are growing only slightly. But the fiscal deficit will fall (-1.5%) because of the slowdown in spending, while the level of public debt will be very satisfactory (30%).

Company insolvencies have risen sharply

The Australian economy is divided between a very efficient mining sector and manufacturing, agricultural and tourism sectors more sensitive to price-competitiveness. The dynamism and strength of the mining sector attract skilled labour and push wages up to the detriment of other economic sectors which have difficulty in recruiting workers and in maintaining the same level of pay - factors which weaken these businesses and depress their margins. The slowdown in construction could slightly affect civil engineering companies, which will greatly benefit from investments in mining and in port and railway infrastructures. With difficult access to credit, payment delays tend to become longer. Bankruptcies accelerated in the second half of last year (+13.3%) a, as reflected in Coface's payment incidents index, which stands above the world average.

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New Zealand (A1)

Risk assessment

Public and private investment the main contributor to growth in 2012

The two earthquakes that occurred in the Canterbury region in September 2010 and in February 2011 destroyed 10% of the country's wealth. Therefore growth has decelerated in 2011. Despite the expected acceleration in growth this year, driven by household consumption but above all by private and public sector investment, the situation of the manufacturing industry and its export performance remain fragile. As a result the foreign trade balance will continue to make a negative contribution.

Household consumption benefits from the increase, though moderate, in real wages and by a healthier job market in line with the rebound of investment. The unemployment rate is expected to stabilise at around 6% of the active population. However, spending is limited by the process of debt consolidation, begun in 2008, which has resulted in a 10-point reduction in debt down to 147% of disposable income. Spending is also be constrained by the return to saving - negative before the crisis, and now above 5% of disposable income. Investment in housing is sustained by an increase in the number of first-time buyers, attracted by the maintenance of low mortgage interest rates (6.5% against 9.5% before the crisis) and by the price slowdown since Autumn 2011. It should also be spurred in the second part of the year, at the best, by the reconstruction of homes destroyed in Canterbury. This prospect, however, depends on the cessation of aftershocks which were still observed at the end of 2011 and the settlement of insurance claims. The damage is estimated at more than 25 billion US dollars over five years (commercial structures and infrastructures included). In this context, the government has included more than 9 billion in the 2011 budget, doubling the deficit. The spending options open to the government over the coming years will be severely limited in the context of cutting back on public expenditure, making it impossible for the government to support projects other than the reconstruction of Christchurch and its region. The reduction of the fiscal deficit is expected to start this year but public sector debt is expected to grow rapidly at the same time, although remaining contained.

Mining sector drives exports

Imports have, over two years, made up for the ground lost during the year of recession, with companies taking advantage of the appreciation of the New Zealand dollar to increase purchases. These are expected to slow to around 6% in 2012, as the rebuilding of stocks of intermediate goods and consumer goods slows. Exports for their part suffered little in 2009, supported by lively demand from Australia, the country's main trading partner (13%) and from emerging Asia (32%). They should however grow in 2012 thanks to the dynamism of the mining sector, whilst the manufacturing and tourism sectors continue to suffer from the high exchange rate for the New Zealand dollar. This unfavourable level of exchange rate is notably generated by the conversion of revenues from exports of raw materials and the attraction of the currency for foreign investors. Raw materials prices (milk, wool, livestock and timber) are expected to remain high or even rise in the case of milk and meat in line with the sustained demand from emerging countries and low stock levels. But in an uncertain context, exports suffer from a more marked slowdown than expected in emerging Asia and China in particular (10% of exports), especially as then Australia's economy would also be affected and, indirectly, that of New Zealand.

Spectacular increase in bankruptcies

The reconstruction of the Christchurch region, when it will start, should boost activity in the building and public works sector and associated branches such as architects' offices, construction materials, timber... Exporters of manufactured goods and the tourism service sector are suffering from the high exchange rates and, for the former, from the rising cost of inputs which not even the strength of the currency can totally offset. In the event of sustained volatility of the New Zealand dollar, small firms will be weakened, as they generally lack the expertise to cover themselves against the risk. After the enthusiasm aroused by the world rugby cup, the sectors orientated to the domestic market bear watching. There was a spectacular 174% surge in company bankruptcies in the fourth quarter of 2011 compared with the same period in 2010, as reflected by the slight increase in Coface payment incident index, which, nevertheless is still below than the global average.

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Czech Republic (A2)

Risk assessment

Growth dependent on European demand

The Czech economic recovery was driven by exports, with sales of vehicles, machinery and equipment leading the way. Growth is expected to slow in 2012, however, due to ongoing fiscal consolidation and the recession in the eurozone. Although the automotive parts sector (20% of exports) performed well in 2011, it is expected to be especially hit by the contraction in external demand, particularly from Germany, the country’s main trading partner. Production of IT and electronic equipment, as well as pharmaceuticals intended for export is expected to fall. Foreign direct investment which made a crucial contribution to the dynamism of the Czech economy before the crisis, will remain sluggish. However, domestic investment, especially in the IT equipment sector, will remain steady, supported by bank lending from a well regulated banking sector which is endowed with a large deposit base and which remained solvent and liquid during the crisis. Meanwhile, household consumption, although buoyed by a fall in the unemployment rate to under 9%, will remain constrained by the tightening of fiscal austerity measures. Households have to spend more on health and education, over and above the increase in the single VAT rate due to take effect in 2012.

Reforms crucial for fiscal consolidation

The government, rebuked in late 2009 by the European Commission, will have to bring the fiscal deficit down to 3% by 2013. Following tough discussions within the coalition, the government approved a series of fiscal reforms (health, pensions and fiscal system) aimed at cutting the deficit and limiting the rise in public debt. The key reforms relate to the lowering of tax benefits on homebuyer savings plans and tighter eligibility conditions for unemployment benefit. Moreover, the introduction of a single VAT rate will boost fiscal revenue. Public debt, up by over ten GDP points compared to 2007, will remain sustainable at 44% of GDP. The current account deficit will, moreover, remain under control, suffering only from the contraction in European demand.

Reforms in a difficult social context

The parliamentary elections in 2010 gave a clear majority to the centre-right parties. The resulting coalition, made up of the Civic Democratic Party (ODS), the TOP 09 and the Public Affairs (VV) parties, have 115 out of 120 seats at the National Assembly, is very committed to deficit reduction and an acceleration in public-sector spending reforms.   However, a series of corruption scandals and lack of popular support for the government’s reforms have weakened the internal cohesion within the ruling coalition. In this context, the opposition Social Democratic Party (CSSD) is well placed to win the forthcoming presidential elections in 2013.

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Slovakia (A3)

Risk assessment

Shock originating in Europe will hit activity

The slowdown expected in 2012 will be noticeable, considering the openness of the country, with exports representing 90% of GDP. These are destined mainly for the eurozone, 23% for Germany alone.
There is high specialisation in durable consumer goods, like automobiles (16% of sales) and consumer electronics devices (13%). The decline in western European consumption will affect company investment, although Slovakian companies have the highest profitability levels in the EU, allowing them to maintain spending levels. Inflows of FDIs, which recovered in 2011, are also expected to slow.

The unemployment rate will remain above 13%, so consumption by Slovakian households, worried by a turbulent regional context, will remain sluggish.

A financially weaker economy

Public finances under control and contained inflation meant Slovakia was able to join the eurozone in 2009. Since then, however, public debt has increased significantly and is likely to reach almost 50% of GDP in 2012, a level which is still reasonable when compared with eurozone norms. The new centre-left government has nevertheless agreed to implement the stability and growth pact (3% of GDP) by increasing taxes on higher incomes and on company profits. Companies are indebted in the short term, chiefly to local banks. External debt is also high, representing 70% of GDP. Bank lending, did admittedly, start again in 2011, with lending to companies growing 9% year-on-year after having practically ceased in late 2010. Although Slovakian banks have solid capitalisation and liquidity ratios, the sector is highly concentrated and dominated by west European players. In the context of the liquidity crisis in Europe, credit for the Slovakian private sector could contract sharply. Such a trend reversal would affect the refinancing of private debt.

A change in the majority

The centre-right government of Mrs Radicova resigned following the first no vote in Parliament on the issue of the extension of the EFSF in the autumn of 2011. The legislative elections of March 2011 resulted in an absolute parliamentary majority for the pro-European Social Democrats of former Prime Minister Robert Fico. This was a first since the country’s independence in 1993.

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