Euler Hermes ACI Releases 2007 Global Trade Risk Report

Global trade credit insurer Euler Hermes ACI, the leading provider of accounts receivable insurance in North America, has issued the following report looking at global trade risk in 2007.

WORLD
Benign slowdown
Expect world GDP growth in 2007 of 3.1%, after 3.8% in 2006 with growth in the US of 2.2% (3.3% 2006), Japan 1.8% (2% in 2006) and Euro-zone 1.9% (2.6% 2006). Expect inflation to remain under control, helped by stable or modestly lower commodity prices, including oil, though energy supply-side shocks remain a constant risk. Interest rates should be pretty flat, but tighter monetary policy is set to end a period of easy financing for emerging markets, bringing economic policy and stable government under closer scrutiny in 2007. Last minute negotiations may yield progress in the WTO Doha round, though time is running out. Expect bilateral trade pressures to intensify in any event, though world trade growth will still be around 7% (9% 2006). Politically, expect Iraq and the Middle East, including nuclear issues in Iran, to continue to dominate the US agenda, as in 2006. The global savings imbalance remains the key threat to our relatively benign base case.

ASIA
Rebalancing?
Still heavily dependent on US demand, expect regional growth to slow to 7.9% in 2006 from 8.6% in 2006. In China re-balancing and avoiding a hard landing remain priorities, but as this is a key political year, policy will remain cautious. Expect growth to slow. Hong Kong will elect a new Chief Executive with the incumbent as firm favourite. Expect South Korea’s growth to moderate to 4%, though ASEAN should remain above 5%. In Thailand, September’s military coup increased political uncertainty, but hardly dented growth, though this could change if there were more events like the mishandled capital controls in December or the recent bombings. In the Philippines and Indonesia, inflation is back under control, but the risk of political instability remains high. India’s rapid GDP growth (8.5% 2006) threatens overheating, requiring corrective action in 2007 to ensure a soft landing. Sri Lanka is drifting towards civil war and Bangladesh is tense ahead of elections.

LATIN AMERICA
Regrouping
2006 was a year of elections and strong regional growth. In the elections Brazil, re-electing President Lula da Silva, and Mexico, electing centre-right Felipe Calderon, opted for continuity. Both face stiff challenges in 2007, as Brazil’s growth disappointed and President Calderon won by the slenderest margin. Ecuador, Nicaragua and Venezuela chose the radical left, but Peru the pragmatic left. Ecuador’s President Correa has set out his radical agenda. In Nicaragua President Ortega may be more moderate, though still aligned closely with Venezuela where President Chavez is extending his radical policies after his re-election. Yet from a policy perspective 2007 may need to be more a year of consolidation as external conditions turn less benign, though pragmatic policymakers start from a stronger base as country risk indicators have improved. Expect regional growth to slow to 3.9% from 4.8% in 2006. Only Argentina of the major economies has a presidential election in 2007.

CENTRAL & EASTERN EUROPE
Reappraisal?
There are less pro-business, market-friendly governments in Poland, Ukraine and Slovakia after elections in 2006 and in the Czech Republic and Bosnia-Herzegovina stable coalitions have yet to emerge. Nonetheless, this will have limited economic impact. In Turkey and Hungary, however, deep macroeconomic imbalances have required tighter economic policies that have slowed growth and there will be no room for policy errors in 2007. Elections will dominate in 2007 in Estonia, Croatia, Serbia, Turkey and Russia. As of January 2007, Slovenia will benefit from Euro adoption and Bulgaria and Romania from EU accession, though risk in the two latter will remain high owing to double-digit current account deficits (as % of GDP). Most CIS economies in the region will suffer from large increases in the price of gas imports from Russia. Overall, expect regional growth to slow to 5% in 2007 from 6.2% in 2006, mainly owing to less benign external conditions.

MIDDLE EAST
Middling?
Politics and diplomacy are likely to over-shadow regional economic successes in 2007, as they did in 2006. Key challenges remain international attempts to limit Iran’s development of its nuclear sector outside IAEA guidelines, Lebanon’s uncertain domestic politics, Iraq’s continuing insurgency and the status of the Palestinian territories. Do not expect swift and satisfactory resolution of any of these issues. Meanwhile, oil and gas prices may ease with a slowing world economy, but hydrocarbon revenues are likely to continue to underpin fiscal and current accounts and solid growth in Saudi Arabia, Kuwait, Qatar and UAE. The latter remains the most dynamic economy, at the forefront of diversification from oil and gas. High liquidity has been channeled into foreign assets but also into local real estate and equity markets, where a correction is underway. Expect regional growth to slip under 5% in 2007 after four consecutive years of 5%+.

AFRICA
Challenging?
Regional growth will dip in 2007 as global commodity demand slackens, after four years of 5%+, but will remain above trend, aided by further debt forgiveness under HIPC and G8 initiatives. The ANC of South Africa will choose its successor to Thabo Mbeki and therefore the president-elect for 2009 but do not expect radical policy changes. Nigeria has presidential elections in Q2 but Olusegun Obasanjo is due to stand down and the political future is uncertain, with further violence likely. Elsewhere in West Africa, Cameroon, Liberia and Sierra Leone are improving (the latter two from a low base) but Côte d’Ivoire remains divided. East Africa is at risk of instability spreading from the Horn of Africa, where Ethiopia has strained relations with Somalia and Eritrea. In North Africa, high oil revenues are bolstering Algeria and Libya. In Egypt, President Mubarak has indicated that he may seek to remain head of state indefinitely.