Euler Hermes Issues Global 2006 Economic Assessment

January 5, 2006

Euler Hermes ACI, a provider of trade credit insurance and risk mitigation information, has released a special global risk analysis report from its U.S. headquarters in Maryland.

The company, a subsidiary of French insurer AGF, which is in turn part of the Allianz Group, sees continued, if somewhat slower, worldwide growth in 2006 “of 2.9 percent, after 3.2 percent in 2005 — largely a reflection of tighter monetary policy — with growth in the U.S. of 2.7 percent (3.5 percent 2005) Japan 1.8 percent (2.3 percent in 2005) and Euro-zone 1.8 percent (1.4 percent 2005). Stable or modestly lower commodity prices, including oil, allied to tighter monetary policy should ensure that inflation remains under control.”

However, the study warns that: “Supply shocks, particularly in energy, remain a downside risk. While looming deadlines for the WTO Doha round could yet focus minds sufficiently to make progress, expectations remain low. In any event expect bilateral trade pressures to intensify. Nonetheless, world trade growth in 2006 should remain robust. Politically, expect Iraq and the Middle East, including nuclear issues in Iran, to continue to dominate the US agenda, which could distract attention from elsewhere. The growing global savings imbalance is a key threat to our relatively benign base case.”

The report breaks down its risk analysis by region. The following is a summary of its conclusions:

ASIA – “Maintaining momentum:”
Expect regional growth of 6.9 percent after 7.4 percent in 2005, with China down to 8.5 percent from 9.3 percent in 2005 as the authorities continue their efforts to steer the economy towards better balance. Expect only slow movement on the exchange rate front, however. Hong Kong should consolidate recent impressive growth rates, though Taiwan may only repeat the 3.5 percent of 2005. Expect India, the second Asian giant, to record another year of 7 percent growth and maintain the tentative rapprochement with Pakistan. Sri Lanka and Nepal continue to provide security concerns. Growth in South Korea will accelerate to around 4 percent while ASEAN growth should remain around 5 percent. However, the Philippines — having weathered political crisis in 2005 — and Indonesia will both need to tackle increased inflation stemming from higher oil prices. Security problems continue in southern Thailand and have re-emerged in Indonesia.

LATIN AMERICA – “Popular choice:”
Elections will dominate 2006. The main concern is the potential shift towards nationalism/populism. Both Brazil and Mexico face presidential elections. In Brazil President Lula will look for lower interest rates to boost growth and his flagging re-election prospects. Mexico looks like being a close three-way race. However, sound economic policies in both countries in recent years should underpin stability through a traditionally testing time. In the Andean region elections may fail to resolve deep-rooted social instability, whatever the outcome, though in Colombia President Uribe’s probable re-election signals orthodox policy continuity. Already in Bolivia a nationalist leader has been elected convincingly. Expect Venezuela’s influence to grow, particularly as an alternative financing source. Argentina having repaid its IMF liabilities is also free to pursue its own, less orthodox economic route. Expect regional growth to slow to 3.7 percent from 4.2 percent in 2005.

CENTRAL & EASTERN EUROPE – “Westward ho!:”
Regional growth slowed from 7.3 percent in 2004 to a still solid 5 percent in 2005. Expect a similar pace to be maintained in 2006. Some of the new EU member states face moderate economic risks, in particular Hungary and Latvia, owing to high current account deficits. Slovakia, however, recently entered ERM II. Slow progress on reforms in Bulgaria and Romania could put back prospective EU entry by a year from 2007 to 2008. Croatia and Turkey face high external liquidity risk, but both started EU accession negotiations in October 2005, although the latter’s prospect of full membership remains doubtful. Limited oil production capacity will continue to restrain growth in Russia despite high oil prices, and the investment climate remains problematic, as it does throughout the CIS region. Ukraine faces renewed political uncertainty ahead of parliamentary elections in March and the doubling of Russian gas import prices threatens growth.

MIDDLE EAST – “Oils well?:”
A sustained period of high energy prices has boosted the economies of oil and gas producers (including Saudi Arabia, Kuwait, Qatar and Iran) and provided positive knock-on effects elsewhere in the region (including Jordan). However, expect regional GDP growth to moderate to 4.5 percent in 2006 after 5 percent in 2003-05 as global conditions ease. With high levels of liquidity, however, the regional economy will remain robust. Regional stock markets and real estate sectors have been principal beneficiaries of a more diversified portfolio approach to petrodollar disposition. The UAE is at the forefront of diversification into tourism and financial and trading services. Domestic political tensions in Lebanon have abated but diplomatic and security issues with Iran and Syria will continue to command attention, as will the ongoing insurgency in Iraq. A major party re-alignment is reshaping the political scene in Israel without causing instability, but expect Palestine to remain a key regional concern.

AFRICA – “Curate’s egg:”
Expect regional growth of 4 percent in 2004-05 to ease to 3.5 percent in 2006. Oil producers (particularly Nigeria and Angola) have improved external liquidity but political hurdles remain. Data revisions have boosted South Africa’s recent growth record and the region’s largest economy continues to demonstrate the benefits of sound economic policy implementation. In East Africa, Kenya’s constitutional amendments were rejected in a referendum and Uganda’s favored status with donors and IFIs is under threat from perceived reverses in political freedoms. There is concern that Ethiopia and Eritrea may renew hostilities. In West and Central Africa, drought and locusts are exacerbating famine conditions in Mali and Niger, while indefinite postponement of elections in Côte d’Ivoire leaves the country divided and a peace settlement elusive. In North Africa, Libya will attract further inward investment into its energy sector as global oil companies seek diversification of supply.

For more information about Euler Hermes ACI and its products and services, go to the company’s Web site at:

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