For this year’s snapshot of the risk factors associated with the top U.S. trade partners, we again turned to Coface, a world leader in trade-credit information and protection, for their expertise and analysis. The sobering news is that the 2008-2009 credit crisis, defined as a substantial rise in corporate defaults stemming from an economic shock, is quite serious, with simultaneous recessions in the world’s three major industrialized regions: Japan, Western Europe, and the United States. Furthermore, dwindling demand coupled with a credit crunch brought on by the banking crisis is a vicious cycle that can only be broken by a restoration of confidence, according to Coface. On a better note, the credit crisis should end by late 2009, Coface believes, and if the global economy has indeed reached the proverbial ‘bottom’ and has begun to stabilize, then we can say with assurance that we are setting foot on the path to recovery. –Lara Sowinski, Editor

Canada

The economy sagged slightly in the second half of 2008, a trend expected to continue in early 2009 before giving way to a period of stabilization and then a modest recovery toward year-end. The economic decline is attributable to persistently poor export performance-with a quarter of Canada’s growth dependent on economic conditions in the United States-and the downturn of investment. Although consumption has shown some strength, it has not sufficed to reverse the negative trend.

Exports will continue to decline due to weakening demand from the United States for manufactured products, the Canadian dollar depreciation against the U.S. dollar notwithstanding. Amid falling world prices, meanwhile, raw material sales will decline more sharply in value than in volume.

Investment will in general also trend down. Corporate investment will suffer from both sluggish demand and less favorable credit conditions. The downturn will be sharper in the western provinces-especially Alberta-which have suffered most from the bursting of the raw-materials speculative bubble. The collapse of oil prices will moreover likely jeopardize several oil shale exploration and exploitation projects.

Households are expected to invest slightly less on housing but that trend will be unlikely reach the proportions observed in the United States thanks to a more tightly supervised system of financing and the absence of past excesses. Sharp declines could nonetheless develop in major western urban areas.

Consumption by households will likely manifest some strength reflecting their generally good financial health and limited indebtedness, the continued growth of real wages, and an unemployment rate that, although rising, remains at historically low levels. Public spending is similarly expected to remain an anchor of economic stability thanks to the public sector’s good financial health.

China

After peaking in 2007 with 11.9 percent annual growth, the Chinese economy cooled in 2008 amid a slowdown of exports and domestic demand. Export growth slowed somewhat mainly as a result of sagging demand from industrialized countries, which absorb 46 percent of total sales abroad. Consumption declined, meanwhile, essentially as a result of growing inflation in 2008 and rising unemployment. Furthermore, a slowdown of investment is partly attributable to the narrowing of corporate margins, particularly in sectors with overcapacity (steel, car industry, real estate, etc.).

To deal with the slowdown, the government has adopted a more expansionary monetary policy. Since late 2008, officials have similarly shifted gears on exchange rate policy to foster stabilization or depreciation of the yuan and bolster export sectors in difficulty. And with the leeway afforded by low public sector debt (15 percent of GDP) and a high savings rate, the government has decided to implement a $586 billion fiscal stimulus plan devoted to major infrastructure projects-with investments in transportation and electricity, reconstruction of areas devastated by the earthquake, among others-and social measures (education, subsidies to rural populations, housing aid, etc.). The plan is intended to avert a severe-slowdown scenario that could cause a significant upsurge of payment defaults and an increase in social unrest.

Despite the fiscal stimulus, the risk of payment failures in particular sectors will nonetheless remain substantial. Low-end export sectors with tight margins, like textiles, shoes, and toys, suffered from the acceleration of the yuan appreciation in the first nine months of 2008, the rise of wages, and problems with product quality. Sectors like automotives and property where sales transactions are commonly made on credit have also been in difficulty. According to Coface monitoring records, payment behavior has been deteriorating-a trend likely to worsen in 2009 as the economic slowdown tightens its grip.

Mexico

Affected mainly by the economic recession in the U.S. along with the international financial crisis, Mexico is expected to suffer a severe economic downturn in 2009, despite fiscal stimulus measures taken by the government. Monetary authorities will also experience difficulties in controlling inflation, attributable mainly to the peso depreciation and pessimistic expectations.

Public debt remains moderate with its foreign component in decline. But improvement in public finances, still dependent on oil revenues, will require further efforts on reform of both the tax system and the state-run oil company PEMEX. It will thus be a very slow process. With a steady decline in oil production compounded by the fall of oil prices and the downturn of exports to the U.S. and transfers from emigrant workers, the external account deficit will widen. To cover its very large and strongly growing financing needs and also to compensate for a significant drop in foreign direct investment, Mexico will have to turn not only to international financial institutions, but also to financial markets, though at a high cost. But the stable and moderate level of short-term debt and the flexibility of the exchange rate will tend to mitigate, albeit increasing, liquidity crisis risk. The relatively modest size of the banking sector has moreover sheltered it from exposure to risks resulting from the sub-prime crisis in the U.S.

After the adoption of a limited reform of PEMEX in 2008, modernization of the economy continues to come up against strong social and political resistance. Too, the climate of insecurity and violence resulting from the organized criminal activities associated with narcotics trafficking moreover constitutes a challenge to the authority of President Felipe Calderon, whose success will partly depend on improvement in this area.

In this context, the business environment leaves room for improvement and the credit crunch handicaps companies. Large private firms are faced with the drying up of international liquidity. The difficulties faced by the textile, clothing and shoe industries are, however, the traditional ones and result from an inability to compete with their Asian rivals.

Japan

The spectacular fall of economic growth during the first quarter of 2009 (down an annualized 14.2 percent quarter-on-quarter and down 9.1 percent year-on-year), resulting from the decline in both exports and investment, bears out that of all industrialized countries Japan will likely suffer the most severe recession this year with GDP contracting by 7 percent. The lack of reaction by companies in failing to reduce their stocks and costs in the fourth quarter of 2008 paved the way for the fall of corporate profits to their lowest level since 1983. They will therefore have to revise their investment projects downward and adjust production. But production could, however, benefit temporarily from a technical recovery: The vast economic support plan implemented by China and focused chiefly on investment will likely enable Japanese mechanicals and metal processing sectors to limit the deterioration of their business activity. That temporary relief from the overall trend will, however, remain marginal since Japanese exports to China correlate with Chinese exports to the U.S. and European Union.

The improvement in consumer confidence recorded in May was largely attributable to various stimulus measures implemented by the government in the second quarter, particularly for purchases of vehicles and home furnishings. Despite these measures, household consumption-already relatively flat before the crisis-will decline in 2009 (down 2 percent), undermined by the rise of unemployment (5.9 percent) and the decline in disposable income (with financial assets constituting 70 percent of net wealth), and savings are expected to increase to 7.6 percent of disposable income.

Germany

Undermined by the marked weakening of exports, the German economy slipped into recession in spring 2008, a trend expected to continue until autumn 2009 with a timid recovery possibly developing thereafter. Persistently sluggish household consumption will provide little backup support to the economy.

In the context of a severe slowdown of the world economy and trade, exports, which had been the main growth engine (41 percent of GDP) until early 2008, are now proving to be the main vector of the recession. Half capital goods (including automotive vehicles) and half consumer goods, the export trend reflects both the end of the investment boom in emerging and raw material producing countries and the downturn of household demand from the major European and American trading partners.

Faced with stagnating exports, eroding margins, and tightening credit, German industry will likely put its investments on hold. Nonetheless, household consumption will make a slightly positive contribution to growth despite the drop in capital goods purchases like automotives.

In this context, corporate payment behavior, while satisfactory in 2008, could deteriorate in 2009 particularly in sectors heavily dependent on exports, like automotive and aeronautical subcontracting, textiles and clothing, maritime and river transport, and,to a lesser extent, metallurgy, chemicals, and industrial capital equipment.

United Kingdom

With the growing impact of the financial and property crisis on household and corporate spending, the economic downturn will intensify in 2009.

Households have been facing a rapid decline in home prices, which could ultimately fall 30 percent, and tightening credit conditions with their debt representing 170 percent of disposable income. A slumping employment market and the concomitant rise of unemployment-not only in financial services and construction but also in other sectors-will also be a drag on the economy.

Only foreign trade is expected to make a slightly positive contribution to GDP growth, thanks to the drop in imports. Exports, meanwhile, are also expected to decline, but to a lesser extent, due to the sluggishness of foreign demand despite a weakening pound sterling, since a high proportion of sales abroad involve specialties, like pharmaceuticals, software, and IT services that are by nature relatively insensitive to price fluctuations.

In a deteriorating environment, corporate health has been weakening, particularly in construction, property services, transport, machinery rental, distribution (home furnishings, automotives, consumer electronics, clothing), and outbound tourism: all sectors suffering from the defection of consumers. The highly competitive retail sector has been the riskiest of all. Greater London, with the preponderant role played by finance and construction, will be the hardest hit metropolitan area. The positive factors are few in number but nonetheless noteworthy: the pound sterling depreciation benefiting exporters, public sector support for short-term financing, the ongoing preparations for the 2012 Olympic Games, and an acceleration of public infrastructure and housing programs benefiting construction.

South Korea

Despite adoption of expansionary monetary and fiscal policy, economic growth slowed in 2008 due mainly to sagging domestic demand affected by the rise of inflation, deterioration of the labor market, and bursting of speculative bubbles in the stock, property, and credit markets. The rationing of credit also undermined investment by smaller companies. The chaebols, South Korea’s family-controlled conglomerates, remained solid, however, benefiting from sufficient resources to continue investing. Exports decelerated to industrialized and Asian countries-which represent, respectively, 35 percent and 47 percent of sales abroad.

In 2009, the economic slowdown could intensify, with domestic demand remaining flat. Consumption could decline again amid a negative wealth effect linked to the collapse of the property and stock markets and the rationing of credit, with household debt representing 140 percent of disposable income. Moreover, companies also burdened with heavy foreign currency debt will suffer from the credit crunch. Construction, automotive, and ship owners will again be the sectors to suffer most. In addition, the export slowdown is expected to continue, particularly in electronics. Therefore, corporate payment behavior could deteriorate in 2009.

France

The contraction of economic activity in 2008-down a marked 1.2 per cent in the fourth quarter-will continue in 2009 with a further decline of 2 percent expected. Industrial production will likely continue to fall, notably affected by the automotive sector’s difficulties. To cope with the decline in demand from the main European trading partners (the EU provides a market for 65 percent of export sales and Germany 14 percent) and from domestic customers, companies will go on postponing investments and adjusti ng their costs. Explosive growth of unemployment, erosion of financial assets, and limited increases in wage will prompt households to keep their buying in check and to replenish emergency savings.

Exports will tread water, particularly in the automotive and intermediate goods sectors. The current account deficit will nonetheless narrow with sluggish household consumption and the drop in investment undermining imports. The public sector deficit will widen significantly, (to a negative 5.3 percent) as a result of the economic downturn and the rescue measures taken by the government: bank-financing guarantees, support to companies and sectors in difficulty, and public investment spending. Public sector debt will grow meanwhile to nearly 74 per cent of GDP.

Saudi Arabia

Driven by booming oil prices, the revenues raked in these past years have facilitated implementation of vast infrastructure projects, an increase in oil production capacity, a reduction in government debt, and a build-up of financial assets. The kingdom is now in a very strong economic and financial position expected to allow it to cope with the consequences of the world economic crisis that began to appear in 2008 with the fall of stock market indices and capitalizations, the drop in oil prices from July on, in conjunction with a shortage of liquidity and a weakening of foreign demand. In this context, strong growth in the first half, buoyed moreover by a sharp increase in oil production, subsequently gave signs of slowing down, particularly in the petrochemical and oil sectors. The economic downturn and the credit crunch affected household consumption and prompted private investors to cancel or postpone some projects. With inflation easing late in the year, officials took measures to increase liquidity and to stimulate the economy. Bank deposits, meanwhile, are guaranteed by the government.

The leading OPEC oil-producing country, Saudi Arabia will likely continue in 2009 to make the most of the adjustment effort for the downward world-demand trend. Oil production could thus decline compared to 2008.

The business climate improved with Saudi Arabia’s admission to the WTO late 2005. But, it continues to suffer from persistent weaknesses in governance terms. The performance of companies could suffer from the economic slowdown with deterioration of their payment behavior, not unlikely in view of their traditional vulnerability to a downturn of barrel prices.

With barrel prices substantially below their average levels in 2008, a decline in hydrocarbon production will likely result in a sharp drop in export earnings and fiscal revenues, which still derive mainly from oil.

Venezuela

GDP growth is expected to collapse in 2009 with world oil prices and national production falling. The priority given to redistribution of oil export earnings to the detriment of productive investment has moreover jeopardized growth sustainability.

Meanwhile, ill-advised fiscal and monetary policies, in conjunction with inadequate production capacity, have kept inflation very high despite price controls. In view of the resulting huge differential in inflation between Venezuela and its main trading partners in conjunction with falling oil prices, a devaluation of the bolivar in 2009 seems necessary. However, the government is still seeking to delay the timing of a move that will only fan the flames of inflation even more.

The trade surplus is expected to shrink markedly as a result of the decline in oil prices, the stagnation of production, the slowdowns affecting the main trading partners, and the country’s dependence on imports of consumer goods.

In addition, the “21st century socialism” advocated by President Hugo Chávez has resulted in growing economic interventionism by the State, nationalizations, and increased barriers to private initiative in an unpredictable business environment. The President’s victory in the February 2009 referendum reinforces his position in allowing him to stand again for the late 2012 presidential election. Before that date, the November 2010 parliamentary elections will be a new test for President Chávez, whose popularity could be undermined by a prolonged deterioration of the economic situation.

Brazil

After remaining strong in 2008, (and exceeding the 5 percent rate targeted by Brazil’s Growth Acceleration Program), the economy will suffer a very sharp contraction in 2009, dragged down by the effects of the world economic and financial crisis, despite government stimulus measures.

Weaker export performance attributable to the marked deterioration of the international environment, in conjunction with import vigor, is expected to exacerbate the current account deficit. Liquidity crisis risk will increase due to the very sharp growth of already large external financing needs. Although foreign direct investment should cover nearly half of those needs, Brazilian companies will experience greater difficulty in obtaining financing abroad in 2009 than in past years.

Overall, companies are being hampered by credit restrictions (particularly small- and medium-sized enterprises) and/or the exchange rate trend in regular business transactions, or due to debt contracted in foreign currencies, and their payment behavior will likely suffer in consequence. Some sectors continue to face chronic difficulties, such as garment and footwear industries, which are grappling with foreign competition. In other sectors, the more difficult economic conditions have taken their toll on agribusiness, the mining and steel industries, construction, automotives (car makers, parts manufacturers, dealers), and mass distribution (particularly in home appliances and information technology).

Taiwan

After the strong 5.7 percent growth achieved in 2007, and even stronger 6.3 percent in the 2008 first quarter, the Taiwanese economy slowed dramatically for the remainder of the year. This slowdown is mainly attributable to the weakening of foreign demand, particularly from China, Hong Kong, and above all, the United States, the island’s main trading partner, considering that it is the ultimate re-export destination for about 70 percent of Taiwan’s exports to mainland China. Electronics exports, representing 76 percent of Taiwan’s GDP, and tourism have particularly suffered. Domestic demand has also sagged with several adverse trends undermining consumption: the upsurge of inflation (with the island importing all its energy and food), the negative wealth effect associated with the fall of stock market prices, and the rise of unemployment. Meanwhile, tightening credit conditions and dimmer sales prospects have prompted companies to postpone investments. Despite adoption of more expansionary policies, both monetary (interest rate reductions) and fiscal, the slowdown will likely tighten its grip on the economy in 2009 amid weaker performance by industrialized and emerging Asian economies. Taiwan’s economic growth could thus be negative in 2009. In this context, corporate payment behavior has continued to deteriorate and the narrowing margins of Taiwanese companies will bear watching.

Netherlands

Production and exports continued to deteriorate in the first quarter of 2009 with full year growth expected to contract 4.7 percent. Given its open economy, the country is very dependent on demand from its four traditional trading partners (Germany, Belgium, France and the UK). Exports and investment will continue to decline, down respectively16.2 percent and 14.7 percent. With wage growth remaining very moderate and unemployment rising, the contraction of the disposable incomes of private individuals compounded by the erosion of their financial and property asset values will prompt households strained by very heavy debt (170 percent of disposable income) to cut back considerably on spending.

The plans for rescuing the banking sector and stimulating the economy in conjunction with a slowdown in revenues from gas will wipe out the fiscal surplus the country has run since 2005 and increase the debt, nonetheless expected to remain relatively low (nearly 60 percent of GDP). Bankruptcies accelerated these past months, surging 96.4 per cent in the first quarter.

The global credit crunch will further undermine weaker companies in the manufacturing sector, particularly electronics, information technology, and metal processing. Smaller companies that are reliant on the domestic market could be hurt by the slowdown in household consumption.

Italy

The sluggishness that began to grip the Italian economy in 2007 has continued with growth likely to slacken for most of 2009 before giving way to a timid recovery.

Household consumption is expected to remain on even keel despite the large wage increases won in 2008 and the fall of prices for energy and, to a lesser extent, food. Nonetheless, households will be facing higher unemployment, reflecting the stagnation of job creation and the growth of the working population. Although the government has provided underprivileged households with cards for making purchases at reduced prices and extended family allowances to wage earners with temporary employment contracts, they should not expect significant aid from a government that has made a commitment to Brussels to bring public sector finances back into balance by 2010.

Although the competitiveness of exports is expected to stop deteriorating thanks to the light weakening of the euro against the dollar and the moderate growth of the cost of labor in phase with productivity gains, sales abroad will be unlikely to show any sign of recovery before end 2009. They will be faced with weak demand in developed countries, their primary market.

Investment will only grow in the public sector thanks to the accelerated use of European subsidies for infrastructure, research, and environmental protection. Companies meanwhile will make further reductions in spending amid sluggish demand, tightening credit, and a drop in profitability.

Moreover, corporate payment behavior, already below the world average, has deteriorated further. The benefit derived from the euro depreciation, if sustained, and the fall of prices for energy and raw materials, are being cancelled out by the drop in demand.

Belgium

The economic downturn that began materializing during the fourth quarter of last year will continue in 2009 and growth will contract by 1.9 percent. The decline in demand from the main trading partners (with the European Union representing over 73 percent of Belgium’s export market), under way since the third quarter of 2008, will continue to undermine the country’s exports, which have also become less competitive due to high payroll costs (and are above the euro zone average).

Industrial production will continue to fall, down about 4 percent, a trend that will only exacerbate the decline of the production capacity utilization rate, already down sharply in the fourth quarter of last year. Corporate investment will slow, also down about 4 percent, especially with the severe shocks that battered the banking sector in 2008, which prompted banks to tighten loan conditions.

On a positive note, Belgium is a highly multicultural and multilingual country that enjoys a unique geographic location and the presence of European institutions, which have been assets to attracting foreign companies and developing foreign trade. The country is also at the heart of a major economic region and serves as the crossroads of many channels, whether road, rail, or water transport. wt



Risk assessments were excerpted from the Coface Handbook of Country Risk 2009. Additional information is available online at www.trading-safely.com.