No 116 вЂў May 2009 How to cope with the downturn Clothing & textiles industry overview RSA Economic and Business Snapshot April 2009 Regional analysis Gauteng RISK MANAGEMENT CONTENTS HOW TO COPE WITH THE DOWNTURN COVER FEATURE Johannesburg - Gauteng IN THIS ISSUE: How to cope with the downturn вЂ“ p2 Clothing & textiles industry overview вЂ“ p4 Unlimited Alternative to Money by awb вЂ“ p6 How To Ramp Up Cash Flow and The Most Profitable Sales by awb вЂ“ p7 Country Report The United Kingdom вЂ“ p8 Regional analysis Gauteng вЂ“ P11 Credit Guarantee's guide to Asia - April 2009 вЂ“ P15 World Markets Update вЂ“ P17 Kidnapping for ransom on the rise вЂ“ P21 RSA Economic and Business Snapshot April 2009 вЂ“ p22 2 No 116 вЂ“ May 2009 T he current down cycle is characterised by severe lack of confidence in the financial system which has, in turn, led to risk aversion and capital hoarding. There has been severe distrust between banks resulting in LIBOR rising to compensate for financial market risk. In some countries the banking system has collapsed or been nationalised. Property prices have fallen, bank balance sheets are overstretched and the stock market has plunged, giving rise to panic and a flight to safe havens. The financial crisis is now impacting the real economy with an abrupt end to the commodity boom, a rapid deterioration in retail spending and the beginning of job lay-offs. Although companies have seen a major setback in their investment operations, the impact on persistency and new business has been slower to come through вЂ“ but 2009 will be a tough year. How do insurers cope with the downturn? Management of costs is critical, and needs to be considered in light of insurersвЂ™ ability to maintain sales and retain customers. For insurers, salaries are the biggest cost. It is a major challenge to manage costs in a manner that keeps staff satisfaction levels high. Cost saving plans must be reviewed for coherence and realism of outcome. Failed cost cutting processes are frequent programs should then be reviewed in a year or two to see whether they have produced the desired results. A further cost management measure worthy of consideration is the possibility of shared services, e.g. for the IT and HR infrastructure. The consolidation and standardisation enabled by shared services does more than reduce costs, it also reduces complexity so that businesses can respond to opportunities faster. The more shared services are integrated with the companyвЂ™s strategic goals, the more useful they can be in a constantly changing environment. Now is the time to start thinking of shared services as a higher value adding centre, a strategic business asset, rather than a cost centre. The companies that will survive these difficult operating conditions are those that re-think their product strategy by launching appropriate new products and managing profits by product line. It is essential to make sure that the product strategy meets the customersвЂ™ needs for security and value. Then, focus on profitable products and withdraw unprofitable products in an orderly fashion. In good times, one is so busy concentrating on good products that the nonprofitable ones are not weeded out. Look at profitability by product line. When times are tough, there is always a temptation to cut advertising and other brand spend. This is unwise because brand awareness is very important, particularly in a market such as South Africa with low barriers to entry. Customers look for security and a trustworthy brand so it is important to remain visible and active. At this time, companies would be well advised to look carefully at their distribution strategy for the future - review growth and value of new business by distribution arm. In South Africa, the insurance industry continues to be characterised by an intermediary dominated distribution channel. While direct channels are being increasingly utilised, especially in personal lines, brokers continue to be a primary distribution force because of their ability to offer advice. With the impact of aggregators entering the market, this may change fast. How companies face this challenge at a time when new business is drying up is potentially the major differentiating factor in the medium term. The down cycle is a perfect time for scenario planning and The Column by Roger Munitich GM: Marketing and R&D, Credit Guarantee Business Rescues Chapter 6, as this has become colloquially known, will replace current Judicial Management practices. The need to conserve viable businesses and jobs, is in itself a laudable proposition, butвЂ¦ Intended to be вЂ�debtor friendlyвЂ™, look out for:- plans must be reviewed for coherence and structural fit. If companies are too one-track minded they can be very vulnerable and alternatively they can be so diversified that they lose focus. In the current climate of down cycle but still a skills shortage, it is crucial to retain key staff ready for the upswing. So leadership needs to create opportunities and ideas to make sure their staff are stretched. It is important to align incentives with company goals; monitor staff satisfaction surveys and turnover for improvements/worsening. Retrenchment of staff needs to be rational - it should be a last resort option, since reacquisition of skills can be tough. South Africa has a relatively solid financial services industry but, that said, risk management will be a major focus for the next few years. There is a relatively solid position in South Africa of listed insurers and most non-listed insurers. Financial institutions have always focused on best practice but now Solvency II aims to align an insurerвЂ™s capital requirements to risk taken so as to improve their overall risk management. Companies will have the freedom to choose their own risk profile, provided that they hold commensurate capital. Ultimately, this should lead to significant improvements in the quality of risk management of insurers. Although Solvency II will not apply to South African insurers directly, any revisions to the current framework are likely to take the IAIS principles on assessing insurance solvency into account. Solvency II is, therefore, seen as an important guide as to how the South African framework may look in future. In conclusion, the outlook for the insurance sector overall will consist of job freezes, cost reductions and new projects postponed. There will be solvency challenges if stock markets continue downwards. Companies should search for new markets such as: untapped South African markets, Africa and beyond. Previous downturns have taught that we have to manage expectations, including our own. Therefore, companies should focus on playing to strengths and acquiring good businesses. Management of the business will still be in the hands of the same people who got it there in the first place, despite professional вЂ�supervisionвЂ™. Both secured and unsecured creditors have equal rights. This could result in вЂ�voting blocksвЂ™ being formed, to the detriment of some creditors. There is no вЂ�timeвЂ™ provision in the Act stipulating how long the вЂ�rescueвЂ™ can be enforced. Longer term, this means that creditors will carry the cost of the вЂ�rescueвЂ™. The вЂ�independent supervisorвЂ™ could cancel or suspend contracts in force at the time of the вЂ�rescueвЂ™. This could infringe the вЂњLaw of ContractsвЂќ. Unscrupulous directors who may initiate вЂ�rescue provisionsвЂ™, in order to ensure that their own вЂ�nestsвЂ™ remain lined. Issued on behalf of: Deloitte: Contact: Giles Waugh, Director Actuarial and Insurance Solutions Tel No: 011 209 8106 Mobile: 083 680 7990 No 116 вЂ“ May 2009 3 INDUSTRY OVERVIEW Clothing and textiles industry overview T 4 he industry took a large blow recently with Seardel announcing its intention to close down the spinning, weaving, finishing and denim divisions of Frame Textiles' vertical pipeline and that 1,400 jobs would be lost, should the closure proceed. This is just another notch in the barrel of the industryвЂ™s long litany of woe, which has seen numerous concerns close over the years and tens of thousands of jobs lost, despite the ability to manufacture a wide and diverse range of products. Job losses of around 70,000 over six years, some 40% of the total workforce, are reported to have occurred. Background A Who Owns Whom report on the Manufacturing of Wearing Apparel (excl. fur), described the sector enjoying вЂњa measure of protection from massive imports from Asia prior to 2004. With the falling away of the Multifibre Agreement it was suddenly No 116 вЂ“ May 2009 exposed to the workings of вЂ�free tradeвЂ™ (in a sense not free trade due to unfair advantages) and the massive and unlimited influx of Chinese imports. This resulted in an immediate contraction of the industry marked by job shedding and closure of textile mills and clothing manufacturing companies. Only two years later were controls reintroduced nationally after collaboration with the Chinese in the form of the Voluntary Restraint Agreement. The result: the market could not speedily adjust upwards due to massive downsizing which had taken place in the interim period.вЂќ The report adds that the 2004-2006 period saw a relatively stable exchange rate of around R7/$, which in turn encouraged imports. Exporters have over the past few years been able to rely on a weakening rand. Quota restrictions on Chinese imports were instituted for two years from 1 January 2007, although new regulations post December 2008 are yet to be finalised. This quota restriction may also have allowed other Asian imports to gain a local foothold. Current conditions: - Exchange rate depreciation has seen some buyers turn local again as rising import prices become less competitive and as the consumer recession deepens. - Many moth-balled mills from 18mths/2yrs ago are too expensive to re-tool now, while skilled machinists were also let go. - Chain stores are trying to source locally, but manufacturers have been battling to produce to meet such demand. - Failures are predominantly in small-to medium-sized areas where there is very little experience of trading in tough times. - Manufacturers are hanging in there despite factories being on short-time; - giving manufacturers production allowances to improve competitiveness. Firstly, this goes against the warnings of raising protectionist barriers in the face of the global crisis. Secondly the вЂ�buy localвЂ™ campaign will never gain momentum if large political parties insist on sourcing caps and t-shirts offshore, as has occurred in the run-up to the 22 April elections. Thirdly, the extent of the purported package is in response to the numerous incentives offered to clothing industries worldwide which have exacerbated domestic stresses. Finally a Business Times report says that critics of the plan argue that the needs of labour have been put ahead of those of industrialists and investors. As quoted by the report, the real issue is whether it will вЂњaddress the institutional weakness, and recognize that there will be winners and losers. Decisions need to be based on some very good research and implementation must be effective.вЂќ Yes indeed, but will this in all probability actually occur? very few knitters left; consolidation/ monopolisation dominates. - SARS clamping down on illegal imports only now, however this is pushing some operations over the edge. This latter point bears highlighting. Illegal and/or pirated imports have flooded the market in recent years, while fraudulent documentation allows importers to avoid customs duties. While the recent efforts to thwart such illegal activities are to be welcomed, it is symbolic of the haphazard approach to the overall strategic management of the broader sector. The sector has also had to deal with declining domestic consumer demand as rising interest rates and escalating inflation eroded buying power; subsequently the global crisis has exacerbated the situation, with massive international job cuts, which in turn has curbed both spending and demand. Credit Guarantee's experience shows a large jump in the number of payment extensions being reported; especially concerning is that this involves companies that were traditionally considered safer than the norm. Consequently suppliers are seeking significant cover on what were traditionally regarded as blue-chip buyers. Similarly, a sharp increase in companies working short time and/or conducting shut-downs has been detected. All of this points to an industry in distress. Bizcommunity.com highlights many other flaws in the stateвЂ™s incoherent approach to policy applicable to the sector. The Duty Credit Certificate Scheme (DCCS) allows exporters of textiles and clothing certain import duty rebates; this allows cheaper import of inputs and thereby a competitive advantage. This practice however is against World Trade Organisation (WTO) rules; what the South African Customs Union (Sacu) does is renew it every year as it ponders a replacement. The result вЂ“ although not many local exporters are competitive, the uncertainty surrounding the scheme allows for little forward planning and the impact on concerns in Swaziland and Lesotho has been devastating. India is said to be contemplating a programme of export incentives to support itвЂ™s clothing, textile and leather manufacturers and even though this also potentially flouts WTO rules. The report concludes that the real issue is the speed with which the Indian authorities have responded to the current crisis; local policy paralysis has seen many exporters abandon global selling efforts and try to sell domestically. This in turn is aggravating the situation facing manufacturers geared to the local market; while consumers should benefit from this heightened competition, it is inappropriate or policy inaction that requires addressing. The Department of Trade and Industry is evidently considering a grand rescue scheme for the beleaguered sector. It is multifaceted and includes: - increasing tariffs on strategic apparel imports to the maximum allowed under our bindings to the WTO - safeguard probes on certain clothing items, thereby allowing for additional provisional duties on such garments - access to cheaper credit through the Industrial Development Corporation, with the IDC also increasing its direct equity exposure (investment) in clothing and textile firms - allowing manufacturers access to the incentives under the new manufacturing investment programme Writing for Bizcommunity.com, Mathabo le Roux states that the Textile and Clothing Industry Developmental Programme, of which the DCCS is a key component, has been agreed by Sacu to be extended from 1 April 2009 but that the ability to sell the rebate certificates be removed. Since many manufacturers do not import clothes, the certificates are of no use unless onsold to other manufacturers or retailers who can utilise the import duty rebates. It is held that this will seriously curtail the export competitiveness of the region, especially Lesotho which exports 90% of its garment production. Tens of thousands of jobs are at risk. This serves to illustrate the totally disjointed manner in which the domestic and regional sector has been administered for years, with the latest proposed steps being a decade too late. More pain is set to follow, involving yet more factory closures and job losses. Further, the debate surrounding support programmes or protectionist measures for the industry, is part of a similar debate relating to other industries such as the motor sector, and indeed trade policy in general. This brings to the fore matters such as whether the consumer should ultimately bear the burden of any support package, whether uncompetitive industries should not rather be forced to close down вЂ“ recall the situation with the archaic steel industry in the US some years back, and remember that many other countries have already moved to protect their economies in some form or guise. Once again however, if we choose to follow suit, who should foot the bill? Luke Doig - Senior Economist - 23 April 2009 No 116 вЂ“ May 2009 5 CREDIT RISK MANAGEMENT Unlimited Alternative to Money by awb sale being made is a profitable sale. In a pure barter system there must exist a coincidence of wants and or desires before a trade takes place. This severely restricts and limits the opportunities for commerce. Money is a medium of exchange with an established value that is accepted in return for goods and services. The dominant form of money is currency which is issued, controlled and limited by governments. In B2B Credit the transactional costs start when a customer desires to buy based on payment at a later date. At this point of purchase efficiency dictates that the information required to help determine if and how credit will be extended to the customer must be gathered. Use of a traditional credit application that the potential customer fills out, and which contains standard terms and conditions of sale, contributes to a sales limiting mindset. An alternative to money is credit and no government printing presses or controls are required. Credit allows for the value of a product or service to be assessed and for profitable sales to happen based on payment at some later date. Credit terms, i.e. IOUs, like money are a medium of exchange. Credit is an intermediary used in trade to avoid the inconvenience and inefficiencies of a pure barter system. Safeguards so as to protect the value of credit extended must exist just as governments must safeguard the value of the money they print. For example what is the value of a Zimbabwe Dollar (ZWD) ? At the time of this article one ZWD is worth .00000003 of 1 USD, that means that it takes about 37,410,000 ZWD to purchase the same as $1.00 US. While the supply of money is limited by how much of it governments print, credit is unlimited; in fact the more of it that is created the greater the demand for products and services created. Credit, properly understood and managed allows for the expanded movement of products and services and for economic growth and prosperity . Credit is a lubricant of commerce and greases the wheels of business. 6 A better tool for the gathering of customer information is a New Customer Information Form, which is completed by the selling agent and which contains an authorization to check a customer's credit to be signed by the customer. Master speaker, award winner, Abe WalkingBear and reasoned argument. So what is the truth or purpose for the use of B2B Credit in the selling of products or services? To understand the purpose of B2B Credit we must first accept that behind the selling of products or services lies a profit motive, that is we need or desire to earn more than we expend in a business transaction. The actual process of extending credit must be driven, based on and support this desire to earn a profit. Beyond the cost of the product or service being sold there are fixed business expenses and transactional costs that must be taken into consideration to ensure that indeed a profit is earned on a sale made. In commercial or B2B Credit, fear of loss and lack of knowledge on the full profit potential and on how to properly manage this unlimited medium of exchange creates bottlenecks, i.e inefficiencies that hinder the fruitful expansion of trade . The Profit System of B2B Credit and A/R Management provides a proven, understandable and useable philosophy and methodology for integrating a seller's specific knowledge regarding their "Product Value at Time of Sale", their potential customers' profile and past performance to allow for the expansion of profitable sales while remaining confident of payment. Fixed expenses are also known as fixed costs and as a rule do not vary with production. Some examples of fixed costs are rent, sometimes insurance, long term equipment costs. The ability or inability to take on more business without increasing fixed costs is a factor that must be considered in profitable credit sales. The Profit Approach In B2B Credit sales it is important to consider the transaction costs that might prove significant; so as to ensure that in fact the Philosophy is the study of existence and truth and relies on a systematic approach No 116 вЂ“ May 2009 Transactional costs are incurred in every economic exchange. These varying costs may include sales commissions , the energy and effort required to find potential customers, the effort of billing customers and of the taking of payments. Terms and conditions of sale are to be determined following the investigation of the customers past payment history and the evaluation of the customer's profile and the seller's Product Value at Time of Sale. Additional transactional costs that go with selling on credit terms are the costs of the investigation of the customer, the evaluation of the customer's profile , i.e who the customer is and how the customer does business, and evaluating the seller's Product Value at Time of Sale. There is also the cost of carrying A/R (accounts receivable), i.e. the time value of money and of bad debt write offs or losses should the customer fail to pay. Why Incur The Costs? We have already stated that the underlying motive or purpose for an economic transaction is the need or desire to earn a profit. Specific to B2B credit sales, credit terms are extended because: 1) Required by the customer. The customer require time after the delivery of the purchased product or service to ensure that in fact what was desired was received. They also require time to process the bill for payment. 2) Downline sales by the customer. The customer company requires time after the delivery of the purchased product or service to add value to the product or service and to make downline sales to its own customers before it can pay. If a customer CREDIT RISK MANAGEMENT company is extending credit terms to its own customers it may require even more time in which to receive payment before it can pay upline suppliers. 3) Customary in the industry. Credit terms are routinely extended in the customer's industry by competitors and are expected. The reason why the costs associated with the extension of credit are incurred is to capture profitable sales that would otherwise be lost. Credit is primarily a function of sale and not of accounting. Old Risk Management Approach is Profit Limiting. If the management of a business believes that credit is an accounting function and all about risk management the end result will be the limiting of both short and long term sales and profitability. more and larger new sales, to improved cash flow, controlled loses, greater repeat sales, elevated customer service levels and customer retention, and to the ability to identify areas of opportunity for improvement that can drive down costs of doing business for seller and customer alike. The proven profit philosophy and set of methodologies that make up the Profit System of B2B Credit Management turns an area of business always thought of as a cost center, as a negative, a necessary evil and as the ugly step-child of accounting into a proactive profit center. In Closing Credit is essential in both short and long term sales and is als an investment in the customer relationship lifespan. DSO (days sales outstanding) and % bad debt, i.e. the % of approved credit dollars lost due to non-payment are and always have been measurement of risk. Use of risk performance measurements will result in the limiting of both short and long term sales and profitability. Two men look through prison bars, one sees the mud the other the stars. Credit allows for the value of a product or service to be assessed and for profitable sales to happen based on payment at some later date. Properly understood and managed B2B Credit is an unlimited alternative to money and to the expanded movement of products and services and economic growth and prosperity . The Profit System of B2B Credit Management In the course of years of hands on work with companies across industry lines the copyrighted Profit System of B2B Credit Management has proven that Credit properly understood and applied can and will lead to The Author Abe WalkingBear is an International Speaker / Trainer / Consultant on the subject of cash flow / sales enhancement and business knowledge organization and use. Co-Founder of www.profitinnercircle.com, and President of www.abewalkingbear.com, he is the author of Profit Centered Credit and Collections 1999, co-author of STAFDA's Foundations of a Business 2007, and co-author of the new international book, The Best Kept Profit Secret: The Executive's Guide to Transforming a Cost Center 2009. http://www.thebestkeptprofitsecret.com/ home.html. WalkingBear has authored hundreds of business articles, has worked with numerous companies in a wide range of industries since 1982 and has spoken at many venues including the Shakespeare Globe Theater in London. A hard hitting and fast paced speaker, he brings life and energy to a critical business function whose true potential has yet to be realized by most businesses. ICM / Mexico, Irish Institute of Credit Management, Evergreen Marketing Group,Vistage, CU, CSU, Texas A&M, N A C M - Kansas City, HTDA, BCFM, Skinner Nurseries, Deardens, Rain Bird, STAFDA, IBM, PEI, Atradius are but a few of the groups, schools, companies and associations for whom WalkingBear has conducted programs. WalkingBear can be reached through: www.abewalkingbear.com. P.O. Box 457, Canon City, CO 81215, (719) 276-0595 email: [email protected] www.abewalkingbear.com How To Ramp Up Cash Flow and The Most Profitable Sales by awb Old military funny money finds new life in business. During this time of dropping sales and extended delays in credit customers' payments an old idea is reborn. During the Vietnam war U.S troops and sailors in Asia were paid in funny money, i.e. MPC (military payment certificate). This funny money which was also called "monopoly money" was in use up until 1973. You could convert MPCs to US dollars upon leaving a designated MPC zone, but while in these zones all you could do with it was go to the post exchange or ship's store and convert it to the local currency. MPC in Vietnam had pictures of movie stars on it and I can't remember for sure but I think the Marilyn Monroe was on the $20 bill. Interesting, but what does this have to do with improved cash flow and more sales? Companies sometimes offer credit customers a 2-10-N30 payment term. i.e. the customer can take a 2% discount off the invoice amount if they pay it within 10 days otherwise the full invoice amount is due in 30 days. The idea being to spur cash flow. Any customer not taking advantage of a 2-10-N30 early pay discount fails to do so for one of two reasons: 1) they don't have the financial ability to do so...no money 2) the sales and credit guys failed to explain that a 2-10-N30 is worth a 37.24% Annual Rate of Return...where else can you get 37.24% return with no risk? The Problem There's a problem with early pay discount that sometimes customers will cut a cheque for payment on an invoice, less 2%, on the the 10th day but will not release the cheque until the 30th day or the 60th day thus defeating the very reason why the discount was offered in the first place... and further creating additional work and cost for both seller and customer in the pursuit of the unearned discount. I've never liked 2-10-N30 terms for these reasons. The Best of MPCs and Early Pay Discounts There is a way to use an early pay discount to improve cash flow and also bring To page 23 + No 116 вЂ“ May 2009 7 COUNTRY REPORT THE UNITED KINGDOM London - England skyline The political picture 8 Great Britain includes England, Scotland and Wales, while Northern Ireland together with Great Britain forms the United Kingdom. England has existed as a unified entity since the 10th century. England and Wales finalised their union in 1536, while England and Scotland agreed to permanently join as Great Britain with the legislative union of Great Britain and Ireland implemented in 1801 with the adoption of the name the United Kingdom of Great Britain and Ireland. Queen Elizabeth II remains the chief of state since February 1952 with heir apparent Prince Charles. Head of Government since June 2007 is Prime Minister Gordon Brown. Following legislative elections, the leader of the majority coalition is usually the prime minister. The next general election is due by May 2010 during which time the Labour Party could be defeated by the Conservative Party led by David Cameron. After thirty years of fighting, Northern Ireland reached a truce in 1997, but the murderous terrorism has resumed with the latest killing of two soldiers and the injuring of four men during March 2009. No 116 вЂ“ May 2009 This represents the first instance where the rebellious republicans who dislike the powersharing agreement of 1998, have killed members of the security forces. The IRA dissident groups believe that the mainstream movement sold out its republican heritage in doing a deal with the unionists. The rebels hope to derail a peace deal that led to Sinn Fein sharing power with the Democratic Unionists at the provinceвЂ™s parliament at Stormont. Trust between old antagonists, on which power-sharing rests, is fragile. The two particular reasons for concern are firstly, security and intelligence and secondly the economic slump, as the peace process had been tacitly predicted on economic growth. The reversal of the thriving economy which is boosted by a big public sector, will be trimming its workforce leading to rising unemployment, amongst other economic woes. Economic quandary The United Kingdom is a trillion dollar economy and is known as a leading trading power and financial centre of the world. The economy has enjoyed long periods of expansion when growth outpaced most of Western Europe, but it has not managed to escape the effects of the global financial crisis. The tightened credit supply and falling home prices pushed Britain into recession during the second half of 2008 and prompted Government to introduce financial stimulus packages to support the economy. Gordon BrownвЂ™s plans for a ВЈ1.4 trillion deal to revive the global economy were quietly dropped to preserve the facade of unity ahead of the recent G20 summit. The US and the UK have backed away from spending proposals worth 2% of global GDP, accepting that each country must find its own way. BritainвЂ™s leading employerвЂ™s organisation warned Gordon Brown that total unemployment would reach 3 million (total population is 61 million) before the next election. The Confederation of British Industry (CBI) said that the economy would see the single biggest drop in output in 2009 since WWII which will lead to a rise of more than 1 million in the jobless total by early 2010 and expects the economic situation to remain bleak over the next eighteen months to July 2010. Its prediction is that Pembroke Castle in Wales the economy would contract 3.3% this year from the previous forecast of -1.7% made in last November. The IMF forecast that the economy would contract 2.8% this year. The economy shrank 2% in the last quarter 2008 year on year and grew 0.7% in 2008. The impact of the recession and the fiscal stimulus is likely to take its toll on public coffers, with net borrowing expected to reach ВЈ149 billion in 2009/10 and ВЈ168 billion in 2010/11, representing 10.6% and 11.8% of GDP respectively. Manufacturing is expected to fall 10.1% this year, while business investment is expected to fall 9.2% with investment by construction firms in private housing set to fall 23.5%. Official figures suggest that the British economy is on course for its worse year since 1931 with overall GDP expected, by research firm Capital Economics, to shrink 4% in 2009. Manufacturing output fell 6.4% in the three months to January 2009 вЂ“ an even faster rate of decline than the 4.9% contraction of the quarter to December 2008. The motor industry, one of the hardest-hit sectors, saw output falling 10.6% during the last quarter of 2008. This has helped push the overall annual rate of decline in output to 12% in 2008. The Economist foresees public borrowing and debt rising sharply to dangerously high levels in the coming years, as economic activity contracts and as the state is required to intervene further to support the economy. The next Government can expect severe economic constraints, which will necessitate a sizeable increase in the tax burden and spending cuts to return the public finances close to a sustainable path in the medium term. Experts have warned that taxes may have to rise by ВЈ25bn a year after March 2009 figures show that the budget deficit swung to a new record as recession took its toll on tax receipts. The budget deficit for February 2009 was ВЈ9bn вЂ“ eight times the shortfall a year earlier, bringing the total public-sector net borrowing for the first eleven months of the fiscal to a record ВЈ75bn вЂ“ over ВЈ50bn more than for the same period of 2008. The IMF has warned that the downturn would plunge the UK into its deepest fiscal deficit among the G20 countries next year, at 11% of GDP. The national debt is over ВЈ100bn - ВЈ20bn more than predicted in the November 2008 budget report. The deficit is expected to grow to ВЈ150bn next year or 10% of national income, breaking the 7.7% deficit record achieved by the Government of John Major in 1993. It will also be higher than the deficit of 8.9% expected for US next year. The UKвЂ™s national debt rose from ВЈ610bn a year ago to ВЈ717bn and accounts for 49% of national income, up from 30% a decade ago. Inflation defied fears of a deflationary spiral to post CPI from 3% in January 2009 to 3.2% in the year to February 2009. Inflation has fallen from a peak of 5.2% last September. The rise in inflation forced Mervyn King, governor of the Bank of England, to write to Chancellor Alistair Darling to explain why prices were still rising above the BankвЂ™s 2% point target. The data appeared embarrassing for the Bank, as it reduced interest rates to the lowest level of 0.5% in its 315-year history and begun an unprecedented programme to create money and to buy assets. This marked the sixth interest rate cut since October last year. The effect of higher import prices вЂ“ reflecting the sterlingвЂ™s near 28% drop in value since mid 2007 вЂ“ seemed to be evident in some categories that made the biggest contribution to the inflation rate. The governor warned Government that it could not afford a second fiscal stimulus in AprilвЂ™s budget. Mr KingвЂ™s concerns were echoed in Brussels where the European Commission gave Britain until 2013-14 to bring its budget deficit back below 3% of national income. The members of the BOE unanimously agreed on the creation of ВЈ75bn of new money вЂ“ known as quantitative easing to try to revive lending and the battered economy. About one in ten UK companies was freezing pay for staff in an attempt to control costs during the recession. The Income Data Services says that average pay was still increasing but at a slower rate. Some sectors such as utility firms and the defence industry were relatively unscathed. BT will not award pay rises to 100,000 staff following the steps of National Express and Tate & Lyle who took similar action. Government will own 70.3% of Royal Bank of Scotland after shareholders shunned a ВЈ5bn rights offering in the UK's largest nationalised bank. The Financial Services Authority chairman Lord Turner has put forward proposals on lending and wants to reduce the banksвЂ™ ability to take excessive risks. His plans aims to prevent banks from lending too much during boom periods and calls for increased regulation for hedge funds. He also wants the bonus systems at financial institutions to be overhauled. His report followed the onset of the financial crisis which brought down several banks, including Northern Rock. Lord Turner admitted that the changes in his proposal are profound and says that the banking system of the future will be different from that of the last decade. To next page + No 116 вЂ“ May 2009 9 COUNTRY REPORT The Abby at Bath - England Personal debt at the end of January 2009 stood at ВЈ1,457bn вЂ“ an increase of ВЈ42bn over the past twelve months вЂ“ slower than the ВЈ116bn increase in the year to January 2008. Total consumer credit slowed to 4.6% in the last twelve months to January 2009 and is at ВЈ233bn. Total lending in January 2009 grew by ВЈ1,1bn. Average household debt was ВЈ9,550 (excluding mortgages) in January 2009. This figure increases to ВЈ21,750 if the average is based on the number of households who actually have some form of unsecured loan and amounts to ВЈ59,730 including mortgages. During January, personal debt increased by ВЈ1m every 40.6 minutes from ВЈ1m every 5.3minutes in January 2008. and 3,045 creditors voluntary liquidations (which are up 16.1% on the previous quarter and 62.2% on the corresponding quarter of the previous year). In the twelve months ending Q4 2008, approximately 1 in 150 active companies (or 0.7%) went into liquidation, compared to the previous quarter when 1 in every 165 (or 0.6%) of active companies went into liquidation. Additionally, there were 2,428 other corporate insolvencies in the fourth quarter of 2008 (not seasonally adjusted) comprising 261 receiverships, 2,018 administrations and 149 company voluntary arrangements. In total these represented an increase of 220.3% on the same period a year ago. Alarming Stats: Firms dealing with BritainвЂ™s debt problems warned that one in 60 people were facing insolvency after recent Government figures showed that a collapsing economy led to record personal bankruptcies and a 50% jump in company failures late last year. The Insolvency Service figures also showed a 75% jump in the number of people declared insolvent in Scotland during the final quarter of 2008. In Northern Ireland, insolvencies increased by 39% year-on-year during the three months ending December 2008. вЂў One in 33 people working is estimated to become unemployed in 2009. вЂў About 2,831 people are becoming redundant every day. вЂў One person every forty-five minutes is declared bankrupt or insolvent. вЂў 144 properties were repossessed daily during the three months to end September 2008. The Council of Mortgage lenders estimate this to increase to approximately 205 a day throughout 2009. вЂў ВЈ91m is the daily interest amount the Government pays on its national debt. 10 There were 4,607 compulsory liquidations and creditorsвЂ™ voluntary liquidations in total in England and Wales in the fourth quarter of 2008 (on a seasonally adjusted basis). This was an increase of 11.9% on the previous quarter and an increase of 51.6% on the same period a year ago. This was made up of 1,562 compulsory liquidations (which are up 4.5% on the previous quarter and 34.4% on the corresponding quarter of the previous year), No 116 вЂ“ May 2009 With flagging auto sales, vehicle manufacturers like Toyota, Jaguar and Land Rover have announced cuts to working hours and changes to shifts, while Honda has closed its UK plant at Swindon for four months. Ford cut 850 jobs in February 2009 and workers at Vauxhall have accepted a cut in hours and wages. Nissan and Bentley have been forced to cut production or jobs since the start of the recession. The UKвЂ™s biggest union has urged Government to hastily put together a package to ensure that 70,000 car workers and their families are not made to pay the price for what it calls вЂ�city greed and recklessnessвЂ™. BritainвЂ™s biggest car retailer Pendragon, is close to securing a new financing deal with its banks. The highly indebted company will be forced to pay ВЈ25m вЂ“ over two-thirds its market value вЂ“ for a fresh set of banking covenants. The companyвЂ™s net debt stood at ВЈ288m at the end of 2008. The company was forced to request a covenant waiver from its bank last year to avoid breaching the terms of its debt. BMW has announced that 850 workers at the Mini car plant in Cowley Oxfordshire are to lose their jobs. The cuts began in March 2009 when the plant moved to a five-day week. This followed a collapse in sales across the motor retail market generally as a result of the credit crunch, with Mini sales having slumped 35% in January 2009. Manufacturers across Britain have been given access to government-backed financing, but are calling for additional help to survive. The construction industry shrank at its most dramatic rate in a decade in March 2009. Demand for new homes has also fallen with the average price of a UK property now back to the 2004 levels. A campaign to protect thousands of building jobs will soon be launched at the Welsh assembly. The Get Britain Building coalition of construction organisations and companies has warned that 300,000 jobs could be lost in the industry around UK with 90,000 job losses predicted for the small and medium-sized builders. Researched and compiled by Lily Maharaj - Credit Guarantee Insurance regional analysis Gauteng Profile Gauteng is the financial and economic hub of South Africa, the economic engine of the Southern African region and the gateway to doing business in the rest Africa. Although the smallest of South AfricaвЂ™s nine provinces, covering only 1.4% of the countryвЂ™s land area, Gauteng contributes about 33% to the national economy and a remarkable 10% to the GDP of the entire African continent. Gauteng accounts for the bulk of all employeesвЂ™ remuneration in the country -estimated at 47.7% and is responsible for 50.4% of all company turnover. It is the most populous province with 10.5 million residents and that figure is expected to reach 15.4 million by 2015. GautengвЂ™s municipalities вЂў City of Johannesburg Metropolitan Municipality; Ekurhuleni Metropolitan Municipality; City of Tshwane Metropolitan Municipality; Sedibeng District Municipality; Metsweding District Municipality; West Rand District Municipality Overview of the economy Once the hub of South Africa's gold mining industry, Gauteng is today the most industrialised and urbanised region in the country, focused on sectors such as IT, manufacturing, and financial and business services. With a highly skilled workforce, world-class communications infrastructure and ready access to African and international markets, Gauteng forms a highly competitive investment destination and trade platform. Gauteng also plays host to a large number of overseas companies requiring a commercial base in and a gateway to Africa. More than 60% of South AfricaвЂ™s research and development takes place in Gauteng and over 80% of all high-tech companies in South Africa are based in Gauteng. Agriculture вЂў GautengвЂ™s agricultural sector is well developed. Major farming activities include poultry, cattle, pigs, vegetables, fruit, flowers and maize. Prominent agricultural districts are that of Bronkhorstspruit, Cullinan, Delmas, Heidelberg and Krugersdorp. Even though most of the countryвЂ™s crops are not necessarily grown in Gauteng, most of them are processed, packaged and transported through and from the province. Manufacturing вЂў The manufacturing industry produces the following: basic iron and steel, fabricated and metal products, food, machinery, electrical machinery, appliances and electrical supplies, vehicles parts and accessories and chemical products. Technology вЂў The technology sector is the newest and is mainly located between Johannesburg and Pretoria. This sector includes highly advanced technology such as telecommunications and advanced computer systems. To next page + No 116 вЂ“ May 2009 11 regional analysis Commerce вЂў Gauteng forms the hub of commerce in South Africa, more specifically Johannesburg. A large proportion of South AfricaвЂ™s national companies have their head offices in this city. The JSE (Johannesburg Stock Exchange) is the largest in Africa. Tourism вЂў At present tourism contributes 8.2% to GDP nationally. This is expected to rise to 12% over the 2010 FIFA World Cup Soccer. GautengвЂ™s performance in the tourism sector is at the top of the provincial log with 10.6% growth since 2003. More than 200 people visit Gauteng each month from different countries across Africa for medical assistance, services and products. This creates an opportunity to formalise medical tourism. Recent economic highlights 12 South Africa is no exception to the devastating impact of the global financial crisis. The slump in the global demand has led to a collapse in commodity prices which in turn has led to a slowdown in earnings by commodity-exporting sectors. Close to 60% of SAвЂ™s exports are destined for the US, EU and Japan and contraction of demand from those economies is having a direct impact on manufacturers and the labour they employ. The South African economy is estimated to have slowed down to 3.1% in 2008 after an impressive growth rate of 5% for the previous four years. The National Treasury estimates that growth will slowdown further to 1.2% in 2009 before it recovers to 4% in 2011. Since Gauteng contributes the lionвЂ™s share of SA economic output and income, therefore any projected slowdown in economic growth implies a reduction in provincial economic growth. Gauteng residents have the countryвЂ™s highest debt level which has a clear impact on the provinceвЂ™s economic health. No 116 вЂ“ May 2009 Even though the global financial crisis is taking its toll on the automotive, retail, manufacturing and mining sectors, the financial services and tourism sectors are expected to grow and contribute significantly to the provinceвЂ™s economic growth. Huge job cuts are expected in the construction, mining and manufacturing sectors. The province has promised to work with labour movements and employer organisations to find creative solutions to respond to the challenge. One of the biggest export markets for the province is the automotive sector. The automotive parts and components industry in Gauteng has 200 firms employing 38,000 workers and contributes about 4.3% of the provinceвЂ™s GDP, which equates to an industry worth about R13bn a year. Provincial barometers with indices developed by independent economist Mike Schussler measure activity in four private sector economies for SAвЂ™s leading provinces. The recession in South AfricaвЂ™s private sector economy is worsening, particularly with the decline in activity levels in the residential property and construction industries. The slump in the market for durable and semi-durable goods is beginning to take on crisis proportions as consumption has slumped. In January, the barometer for Gauteng fell 16.5%, continuing on the downward trend of the previous six months, and it was the biggest decline since its inception seven years ago. The residential and construction industries are in trouble. The impact is clearly evident in broad financial services, property and business services as well as the construction sector. In January the broad financial sector declined in all provinces. Gauteng was affected most with its activity level 25.5% lower. House prices are declining with a glut of properties on the market and it takes longer to sell them. The residential property sector was seriously impacted by the reduction in the number of property transactions, which in some provinces was 50% down on a year ago. The industry is in distress with related enterprises such as estate agents, conveyancers and electricians in difficulties. However the overall construction sector is doing relatively well and in January, Gauteng activity levels increased by 2.1%. Construction of commercial properties such as industrial buildings, office blocks ad shopping centres is still showing good growth, but the residential market is very weak. Infrastructure projects like the Gautrain and soccer stadiums are keeping construction activities alive. The number of new mortgages registered at the deeds office in Gauteng was 42.2% lower than January 2008. Manufacturing declined by 6.8%. Gauteng will realign and adapt its investment strategies to reach its economic growth target of 8% for Gauteng by 2014. It hopes to use infrastructure investment as its economic fiscal stimulus package. Government investment in the Expanded Public Works Program will be stepped up in the coming years to provide both the necessary skills and employment. The provincial government is working with the manufacturing sectors to develop programmes to assist them on curbing potential job losses and expanding their capacity to create decent work for a sustainable livelihood. South Africa should still expect high levels of investment to be generated in the construction and building sector until 2012. Recent developments Government is to spend R70 billion to upgrade and improve some road networks in Gauteng through the Gauteng Freeway Improvement Project budgeted over various phases until 2018; the first phase will be completed by 2010. The levels of congestion on GautengвЂ™s roads are unacceptable and inconvenient costing billions. Equipment will also be installed to manage the flow of traffic and keep users informed about prevailing conditions to improve their travelling times. The project is set to contribute R29bn to the National GDP as well as R13bn towards the Regional Geographic GDP by the end of 2009. A number of jobs will be created during the construction, while skills transfer will ensure the construction workers gain more experience to start their own businesses. The Bus Rapid Transit System (BRT) will go ahead as planned and as agreed to in the consultation process that took place with taxi owners throughout Gauteng despite protests. The Gautrain, the implementation of the Gauteng Freeway Improvement Project and Gauteng Better Roads Plan would enable the province to boost its transport network. From April 1st OR Tambo International Airport began utilising multi-use terminals in order to process international and domestic flights interchangeably. The construction of the OR Tambo Gautrain Station has been completed and has been handed over for final finishing to Bombela, the consortium of companies who holds the concession to build, operate and maintain the Gautrain. The station is the first Gautrain station to be completed and handed over. Cradle City, the first planned city situated around an airport in South Africa is set to form an innovative, sustainable green-driven development situated on substantial 912ha of land surrounding Lanseria International Airport, north of Johannesburg. The development which will comprise a vibrant mix of residential, commercial, office, retail, hotel, resort, entertainment and warehousing and other elements is being undertaken by Amari Land. The vision for Cradle City is to create an unparalleled mixed-use precinct which will provide the opportunity to live, work, play and travel in an integrated environment which embraces new-urban design and green building principles. The number of departing passengers in expected to increase from 300,000 to 7 million in 2017. To next page + No 116 вЂ“ May 2009 13 regional analysis Fifty nine land claims still have to be settled in Gauteng and the North West, according to the regional land claims commissioner. 99.5% of the 13,194 lodged claims had been settled. Virtually all Gauteng claims have been settled with one expropriation case still in court and about R2.5bn had been spent on claims so far. Most claims lodged in Gauteng were urban and have been settled through financial compensation. North West Finance MEC says the relocation of the Merafong Municipality from the North West to Gauteng will go ahead as planned. The North West government will continue to spend part of its fiscal allocation on Merafong even beyond the 1st of April. The decision came after the National Assembly voted in favour of the reintegrating the North Western municipality of Merafong back into Gauteng. Challenges for the province Delivering his state of the province address, Gauteng premier Paul Mashatile said crime remains the biggest challenge facing Gauteng. The province has invested R8 million in recruiting 8,000 street patrollers in 83 areas in the province and the number is expected to grow to 10,000. Progress has been made in tackling poverty, housing and education although the housing backlog is estimated at 450,000. Gauteng Community Safety MEC says the province is ready to host a safe and secure Confederations and World Cup Soccer tournaments. The 2009 FIFA confederations Cup will be the 8th tournament of its kind and will be held in South Africa from June 14-28, 2009, as a prelude to the 2010 FIFA World Cup. Unemployment in Gauteng dropped from a peak of 30.4% in September 2001 to 19.5% in September 2007; this was achieved despite the continued high-levels of migration to the province. However unemployment, especially among young people, remains a burden. The slowdown in external demand of products poses a significant downside risk to the provinceвЂ™s export numbers. 14 Researched and compiled by Sindiso Valerie Mpofu Economic Services No 116 вЂ“ May 2009 Export destinations Credit GuaranteeвЂ™s guide to Asia - April 2009 Notes: Cover = Credit Guarantee cover. Y = Cover available. CBC = Case by case. N = No cover available under normal circumstances or if there is no request for cover. SC = Special conditions. ILC = Irrevocable letter of credit. CILC = Confirmed irrevocable letter of credit. All medium-term transfers will be individually underwritten based on the specific nature and structure of the transaction. COUNTRY - INDONESIA | GOVERNMENT TYPE - Republic | POPULATION - 240m | 2009 POPULATION GROWTH RATE - 1.2% | 2008 GDP - $510.8bn President Susilo Bambang is chief of state and head of Government. The next election is due in July 2009. Election candidates spend an equivalent of 1% of GDP to gain the support of its 171m voters вЂ“ more than thrice the comparable campaign expenditures in last yearвЂ™s US elections which amounted to 0.3% of GDP. This large polyglot nation has seen its debt-to-GDP ratio fall steadily in recent years under the Yudhoyono administration, but fears loom that the global economic crisis may reverse its economic advances. The crisis dampened inflationary pressures, but increased risk aversion for emerging market assets, resulted in large losses in the stock market and depreciation of the rupiah. With global demand slowing and prices for IndonesiaвЂ™s exports declining, economic expansion for 2009 is expected to be significantly lower that the two previous years. The Asian Development Bank forecast that the $433bn economy will grow 3.6% in 2009 from 6.1% last year. Bank Indonesia said that maturing private sector debt would unlikely pose a threat to the exchange rate, while GovernmentвЂ™s foreign debt repayment risk in 2009 remained manageable as well. Government will pay a total of $27.5bn in foreign debt this year. SHORT-TERM COVER - CBC COUNTRY - KOREA, SOUTH | GOVERNMENT TYPE - Republic | POPULATION - 49m | 2009 POPULATION GROWTH RATE - 0.3% | 2008 GDP - $857.5bn President Lee Myung-bak is chief of state and head of Government. The next election is due by December 2012. Advancing into the high-tech modern world has propelled South KoreaвЂ™s economy to achieve an incredible growth record. The country joined the trillion dollar club of world economies in 2004. Government encouraged the import of raw materials and technology at the expense of consumer goods and endorsed savings and investment over consumption. The economy grew between 4%-5% annually between 2003 and 2007. A downturn in consumer spending was offset by the rapid export growth. The global crisis affected South Korea, which saw stock prices fall 40% and the value of the won fall 26% in 2008. GDP growth fell to 2.5% last year and is expected to continue falling in 2009. It will extend a $100bn state guarantee on bankвЂ™s overseas debts until the end of the year to assist lenders through the credit squeeze. Hana Bank, the countryвЂ™s fourth-largest lender, sold $1bn of three-year notes backed by the Government, becoming the first company to tap the state guarantee. SHORT-TERM COVER - Y COUNTRY - MALAYSIA | GOVERNMENT TYPE - Constitutional monarchy | POPULATION - 26m | 2009 POPULATION GROWTH RATE - 1.7% | 2008 GDP - $214.7bn KingвЂ“Sultan Mizan Zainal Abidin is chief of state. Upon his appointment in 2003, Prime Minister Abdullah began promoting investments in high technology industries, medical technology and pharmaceuticals to push the economy up the value-added production chain. Prime Minister Najib Abdul Razak, who took office in March 2009, has pledged to carry out wide ranging Government and social reforms. Government continues to boost domestic demand to reduce the economyвЂ™s dependence on exports, but exports (in particular the exports of electronics) remains an important driver of the economy. The World Bank expects the economy to shrink 1% in 2009 from the forecast 5% growth in 2008. Malaysia and three other countries (including the Philippines), which have been blacklisted by the OECD, are now off the list after they agreed to adopt the OECDвЂ™s regulations. The G20 leaders, who met in London at the beginning of April 2009, cited the countries as uncooperative tax havens. SHORT-TERM COVER - Y No 116 вЂ“ May 2009 15 Export destinations COUNTRY - PHILIPPINES | GOVERNMENT TYPE - Republic | POPULATION - 498m | 2009 POPULATION GROWTH RATE - 2% | 2008 GDP - $168.6bn President Gloria Macapagal-Arroyo is chief of state and head of Government. The next election is due in May 2010. The president prevented a fiscal crisis by pushing for new revenue measures. Declining fiscal deficits, tapering debt and escalating spending on infrastructure and social services heightened optimism over Philippine economic prospects. The economy expanded by 7% in 2007 вЂ“ its fastest rate in three decades, but slowed to 4.5% in 2008 due to the world financial crisis. High Government spending, a small trade sector, a resilient services sector and large remittances from abroad have helped to soften the full effects of the crisis. The president disclosed that about $1bn worth of tourism investments, mostly hotels and resorts, would be opened in the country this year until 2010 despite the global crisis. The tourism industry was growing at an average 10% annually in the last few years. Tourism and the business process outsourcing are among the dollar-earning sectors in the Philippines that have been least affected by the global recession. The country, however, needs higher sustained growth to address its growing population and to prevent poverty. SHORT-TERM COVER - CBC COUNTRY - SINGAPORE | GOVERNMENT TYPE - Parliamentary republic | POPULATION - 4.7m | 2009 POPULATION GROWTH RATE - 1% | 2008 GDP - $154.51bn President S R Nathan is chief of state and the next election is due by 2011. Singapore is a highly developed free-market economy, known for its stability and corruption-free environment. The economy is heavily dependent on the exports of consumer electronics, information technology products and pharmaceuticals and on a growing services sector. GDP growth averaged 7% between 2004 and 2007 but declined to 1.2% in 2008 after having contracted in the last three quarters of last year. Government is hoping to establish a new growth path over the long term that would be less vulnerable to global demand cycles and will continue to retain SingaporeвЂ™s status as Southeast AsiaвЂ™s financial and high-tech hub. Fitch Ratings believes that growth will rebound in 2010. SHORT-TERM COVER - Y COUNTRY - THAILAND | GOVERNMENT TYPE - Constitutional monarchy | POPULATION - 66m | 2009 POPULATION GROWTH RATE - 0.6% | 2008 GDP - $272.1bn King Phumiphon Adunyadet has been chief of state since June 1946. Head of Government is Prime Minister Abhisit Wetchachiwa. Thailand has a well-developed infrastructure with proinvestment policies. Thailand was known as one of the best economic performers in East Asia earlier in the decade, but persistent political crises have stalled mega-projects, eroded investor and consumer confidence and damaged the countryвЂ™s international image. Exports became the backbone of the economy when foreign investment and consumer demand hindered. Export growth averaged 17.5% annually from January 2005 to November 2008. Continued political uncertainty and the financial crisis weigh heavily on the economy. The Central Bank reduced interest rates to the lowest level since July 2004 to stem the economyвЂ™s contraction after exports shrank and consumer prices fell amid the global recession. Exports, which make up 70% of GDP, contracted for four months and the economy is likely to contract for the first time since 1998. Thailand said that it will spend $44.4bn over three years, mainly on infrastructure projects, to help create jobs and spur economic growth. SHORT-TERM COVER - CBC COUNTRY - VIETNAM | GOVERNMENT TYPE - Communist state | POPULATION - 87m | 2009 POPULATION GROWTH RATE - 1% | 2008 GDP - $90.9bn President Nguyen Minh Triet is chief of state with head of Government Prime Minister Nguyen Tan Dung. The next election is due in 2011. This is a densely populated developing country. It joined the WTO in January 2007 after the decade-long negotiating process. Its membership provided an anchor to the global market and reinforced domestic economic reform process. The countryвЂ™s exports increased 900% between 2001 and 2007. Vietnam has been working to create jobs to address the challenges of a growing labour force, but the global crisis is expected to strain its ability to create a significant number of jobs and further reduce poverty. The economy is predicted to suffer from lower exports (which made up 68% of GDP in 2007), higher unemployment and corporate bankruptcies and lower foreign investment. Vietnam plans to increase trade promotion activities and expand its export market to the EU this year. Car sales plunged 36% in the first quarter of 2009 from the same period last year. The World Bank expects the economy to grow by 5.5% this year from 6.2% in 2008. 16 SHORT-TERM COVER - CBC No 116 вЂ“ May 2009 country credit ratings World markets update Compiled by Sindiso Valerie Mpofu - Economic Services The following credit classifications were recently updated. For more information on these and other countries please visit our website: www.creditguarantee.co.za or contact our Export Department. How we rate them Country classifications are based on a numeric and alphabetic basis associated with each country, with the numeric indicator showing the political rating of the country and the alphabet indicating the commercial risk.These range from 1 to 3 on the political rating with 1 being your lowest risk and 3 the highest. Likewise the A, B and C are relevant to the commercial rating вЂ“ A being the lowest risk and C the highest risk. Usually the two ratings are closely linked because the political rating of a country will impact directly on its commercial rating. Factors taken into account when assigning ratings include the following: Political rating Assessing political and economic conditions and stability: вЂў вЂў вЂў вЂў вЂў Environment Economic policies Forex reserves вЂ“ ability to generate Rule of law Access to legal system COUNTRY вЂў Banking and commercial infrastructure вЂў Past history as trading partner вЂў Utilising various sources of information such as D & B, Moody's, S+P, various publications, Internet, Berne Union, ICIA, PASA, IMF, World Bank, etc вЂў Negotiating country limits with reinsurers вЂў Country reports prepared by Credit GuaranteeвЂ™s economic researchers вЂў Credit GuaranteeвЂ™s country underwriting committee. Commercial rating Commercial ratings are based on the financial strength of buyers in a particular country as well as their ability to repay amounts within terms afforded: вЂў Underwriting experience of other credit insurers on buyers in a particular market. вЂў Number of insolvencies / liquidations in a country. вЂў Access to funds for buyers in the market. вЂў Reliable credit information from the respective market. вЂў Trade references within markets. вЂў Global and domestic industry trends and their impact on a market. RATING OVERVIEW AND CGIC (Credit Guarantee) EXPERIENCE & COMMENTS ALGERIA 3C Algeria will begin a new $100-500bn, five-year national infrastructure development programme in 2009. AlgeriaвЂ™s budget for this year is predicated on an oil price of $37 per barrel, a growth rate of 4.1%, an inflation rate of 3.5% and an exchange rate of 65 dinars per US$. Analysts do not expect the state budget to be affected by the global financial crisis in terms of covering the countryвЂ™s main expenditures as long as the oil price remains above $30 per barrel. A long-term strategy based essentially on the diversification of the economy is the main option for Algeria to address the impacts of the global financial crisis as it seeks to reduce its dependence on the hydrocarbons sector. CGICвЂ™s cover is restricted to ILC and we have no exposure currently. BOTSWANA 1B Chief of state since April 2008 has been President Ian Khama who is the son of BotswanaвЂ™s first president. The next election is due by October 2009. A call for the president to be elected directly by the people was rejected by parliament in 2008. The impact of the global financial crisis has definitely hit the mining sector. It has impacted heavily on prices of commodities such as diamonds, nickel and copper, of which Botswana is among the worldвЂ™s leading producers. Financial experts believe that BotswanaвЂ™s healthy reserves will shield it from the full effects of a recession, but expect to see economic growth slowing significantly this year. CGIC has a large exposure with favourable experience on this market. BURKINA FASO 3C Burkina Faso has significant reserves of gold but cotton production is the economic mainstay for many Burkinabe. The country is attempting to improve the economy by developing its mineral resources, improving infrastructure, making its agricultural and livestock sectors more productive and competitive and stabilising the supplies and prices of food grains. The 2009 budget aims to strike a balance between preserving debt sustainability and social and infrastructure needs. CGIC is open for cover on this market on a case-by-case basis where we have a small exposure with good experience. This market is conducive to open account exports but it is important that exporters have thorough knowledge of the country and the importers in the market before undertaking such transactions and take adequate measures to protect themselves accordingly. CONGO 3C Chief of state since October 1997 has been President Sassou-Nguesso. The president is elected for a sevenyear term and is eligible for a second term. The next election is due in July 2009. Oil is the mainstay of the economy, accounting for 75% of GDP and in recent years the country has tried to improve financial transparency in the sector. Oil accounts for 75% of GDP. The IMF forecasts growth of 12.7% in 2009 and 12.3% in 2010, but warned of the impact of the global crisis. The forestry sector in Congo is the secondbiggest earner of foreign currency after oil and has been affected by the crisis with thousands of workers expected to lose their jobs. The crisis is making it difficult for wood producers to find markets for their goods and are cutting prices and thus not able to pay timber taxes and other duties. CGIC has small exposure with good experience in this market. No 116 вЂ“ May 2009 17 country credit ratings COUNTRY RATING OVERVIEW AND CGIC (Credit Guarantee) EXPERIENCE & COMMENTS EGYPT 2B EgyptвЂ™s government will double its economic stimulus plan to 30bn Egyptian pounds ($5.4bn) and it will mostly be spent on new infrastructure projects to stimulate the economy. Economic growth is expected to slow to 4% in the fiscal year ending June this year after three years of expansion above 7%. The slowdown comes as foreign investment, exports and revenue from tourism and the Suez Canal decline due to the global financial crisis. The global financial crisis is likely to have a significant impact on the Egyptian economy as a whole, especially large formal enterprises in key export sectors. Two of EgyptвЂ™s largest manufacturing sectors are ready-made garments which make up large exports to the US and EU and the food industry, which has markets in the EU and Arab region. CGICвЂ™s experience has been good. GHANA 3C Like most developing countries, 2009 is expected to be a very challenging year for Ghana. The IMF has called on the international community to prevent the devastating effects of the financial crisis on Ghana. The Fund stated that Ghana and other low income countries were in need of over $25bn this year. The World Bank has agreed to provide Ghana with a $1.2bn interest free loan to help cushion it against the global downturn. Fitch Ratings revised the outlook on the long-term foreign and local currency Issuer Default Ratings (IDRs) of Ghana from stable to negative, on the back of new data pointing to twin fiscal and current account deficits of 15% and 24% of GDP respectively in 2008 and double digit inflation. CGIC has reasonable exposure in this market with recent experience being favourable. GUINEA 3C Chief of state is Captain Moussa Dadis Camara, President of the National Council for Democracy and Development, who led a military coup following the death of President Lansana Conte on 22nd December 2008. The ruling military junta is planning for elections to be held before the end of the year, but did not make clear whether it would be presidential or parliamentary. The former French colony has been suspended from both ECOWAS and the AU, which prevented junta representatives taking full part in its February 2009 summit in Addis Ababa. The 2008 international non-profit Transparency InternationalвЂ™s corruption index ranked Guinea as the country with the seventh most corrupt image in the world. CGIC has very limited but claims-free experience. JAMAICA 3C Prime Minister Bruce Golding was sworn-in in September 2007. A year after his inauguration various commentators argued that based on a number of key economic measures, including growth, unemployment, inflation, interest rates, JamaicaвЂ™s situation was significantly worse than before and the new government deserves a failing grade. The downturn in the US economy is expected to have a ripple effect on the Caribbean islands. CGIC has very limited but good experience in this market. KENYA 3C Loop holes in the National Accord and Reconciliation Act being exploited by President KibakiвЂ™s Party of National Unity (PNU) have sent Raila OdingaвЂ™s Orange Democratic Movement (ODM) back to the drawing board. The party regrets having failed to negotiate for the inclusion of finer details in the law to offer distinctive powers to the prime minister. In the absence of a clear power sharing pact, ODM has been locked out of public service appointments, heightening tension in government. Kenya needs 900,000 metric tons of corn to tackle a food emergency and is appealing for Sh32bn ($402 million) in aid after poor rainfall and post-election violence in the first two months of 2008 reduced plantings. KenyaвЂ™s economy is expected to grow by just over 4% in 2009 as it continues its recovery but prolonged dry weather and a global slowdown remain a threat to the key agricultural export sectors and tourism. CGIC is open for cover in this market without any restrictions and our experience has been favourable. MADAGASCAR 3C The three-month battle between the opposition movement and the regime left over 100 people dead and dethroned President Marc Ravalomanana from his seven-year rule. Two days after his unseating, 34-year old Andy Rajoelina suspended parliament and replaced it with two new bodies tasked with administering the country until fresh polls are held within 24 months. The power grab was widely condemned by the international community who claimed that RajoelinaвЂ™s army-backed rise to the helm of the Indian Ocean Island was undemocratic. SADC denounced the takeover as unconstitutional and does not recognise the presidency of Rajoelina as SADC claims that his appointment violates the constitution of Madagascar and international principles like SADC, AU and the United Nations protocols. The global downturn has affected the pace of mining development and the political crisis has left the once-booming tourism industry facing ruin as tourists look for alternative destinations. CGIC has suspended cover in light of the political developments. MALAWI 3C In May 2009, Malawi will hold its fourth presidential and parliamentary multiparty elections. MalawiвЂ™s economic boom over the past three years allowed interest rates to fall from 35% to 15% and brought down inflation to single digits from highs of 30%. The Finance Ministry expects the country to struggle to reach its economic growth projections due to lower demand for its commodity exports. The economy is expected to expand by only 7% in 2008/09 from 8% the previous year. Donors contribute about 40% to MalawiвЂ™s annual budget. CGIC has a reasonable exposure to this market. Although our experience has been good, this market is very susceptible to forex delays. 18 No 116 вЂ“ May 2009 country credit ratings COUNTRY RATING OVERVIEW AND CGIC (Credit Guarantee) EXPERIENCE & COMMENTS MALI 3C MaliвЂ™s economic performance is vulnerable to climatic conditions, fluctuating terms of trade, dependence on ports in neighbouring countries, concentration of its exports in three primary sector products, gold, cotton, livestock and weak administrative capability. The government has continued its successful implementation of an IMF-recommended structural adjustment program that is helping the economy grow, diversify and attract foreign investment. Economic growth is estimated at 4.9% in 2008 and is projected to recover to 5.3% in 2009 thanks to favourable weather, high farm-gate prices and policies supporting food production. CGIC has minimal experience in this market and caution is advised when dealing with this market. MAURITIUS 1B Being a small and open economy, Mauritius can hardly be sheltered from global economic hiccups. Despite diversification its tourism and textile sectors remain exposed to the worsening global financial and economic conditions, especially in their main European markets. Mauritian policymakers unveiled a $330 million stimulus package in December to bolster the economy by 1-1.5% and cushion itself from the global financial crisis. It is believed that if the plan is implemented timeously it will allow the economy to sustain GDP growth in the high 3% to 4% range in 2009 with headline inflation edging towards 5.5% in 2009 and 5% in 2010. Mauritian exporters are holding onto their dollar earnings as there is no supply of foreign exchange coming into the market as main export markets slide into recession with little visibility on how deep and prolonged the slowdown will be. This year, the sugar industry faces a 21% drop in prices for sugar sold to the EU, bringing the total reduction to 36% since 2006. CGIC is open for cover in this market without restrictions. This market is not claims-free and exporters must ensure they have taken the necessary precautions in managing payment risk when dealing on open account or unsecured terms. MOZAMBIQUE 3C Chief of state since February 2005 has been President Armando Guebuza and the next election is due by December 2009. Government claims that it is winning the battle against inflation and according to the latest data from the National Statistics Institute (INE), inflation in December 2008 was only 0.47% compared to 2.8% in December 2007. Inflation in 2008 was 6.19% from 10.3% in 2007. The central bank put the countryвЂ™s net international reserves on 31st December 2008 at slightly over $1.6bn, covering five months of imports. CGICвЂ™s exposure in this market continues to grow whilst our claims experience has been good; dealings should be undertaken with full information on hand as payment problems can occur. NAMIBIA 2B Chief of state since March 2005 has been President Hifikepunye Pohamba. The next election is due in November 2009. NamibiaвЂ™s GDP was estimated at $7.4bn in 2007 with growth that year of 3.6%. An IMF mission met with Namibian authorities in light of the global economic meltdown. The Fund noted that after three years of solid economic expansion, NamibiaвЂ™s growth was expected to have moderated to 3% in 2008 and is forecast to slow to 2% in 2009.CGIC has a large exposure on this country with favourable experience. NIGERIA 3C NigeriaвЂ™s Finance Minister said while Nigeria was able to weather the first round effects of the global crisis, subsequent deterioration in the global economic and financial environment has exposed the country to considerable shocks. The Niger Delta crisis has paralysed the countryвЂ™s oil production and the countryвЂ™s economy is hanging in the balance with the depreciation of the currency against the US dollar, poor power supply and the drop in capitalisation of the stock exchange. The West African nation has also removed subsidies on gasoline and petroleum products to cut expenditure as part of a package of recommendations presented to the Presidential Steering Committee responsible for mitigating the impact of the global financial crisis on Nigeria. CGIC has reasonable experience in this market. SENEGAL 3C Macroeconomic developments in 2008 were less positive than expected with growth estimated at 3.9% in 2008. SenegalвЂ™s economy is expected to grow 4% in 2009, reaching 5.5% a year in 2010 and 2011 due to increased phosphate production and recovery in private sector activity and FDI related growth. Budget constraints in donor countries could result in reduced aid, which currently accounts for about 2% of GDP annually for Senegal. CGIC is open for cover without restrictions in this market. SEYCHELLES ZZ Seychelles has consistently over-run its budgets, borrowing heavily from foreign Governments and commercial creditors to invest in health, education and housing, as well as tourism and fisheries. The island is experiencing a severe economic malaise with the discovery that the country is bankrupt and that Government had taken public loans in excess of $800m and private loans exceeding $500m. The country entered into an economic reform programme with the IMF last November. The IMF recently forecast that the SeychellesвЂ™ economy would contract by about 9.5% this year as tourist arrivals in the heavily-indebted island nation decline. CGIC is currently off cover in this market. SWAZILAND 3C Over the past 15 years Swaziland has become characterised by a decline in economic growth, spreading poverty and a rise in mortality and morbidity rates. SwazilandвЂ™s ability to cope with its ongoing humanitarian crisis will not improve until its under-performing economy picks up. Real GDP growth is forecast at about 2% in 2008-10. Even though the global financial crisis has not affected the banking sector, the tourism industry has taken a knock and the decline in tourist arrivals is expected to continue into 2009. The IMF expects SACU revenues (the country's main source of fiscal revenue) to remain high at least until 2010, after which they might be subject to declining pressures from factors like increasing trade liberalisation. The IMF advises that Swaziland must now decide what to do when SACU revenues dry up. CGIC is open for cover without any restrictions in this market. When conducting open account business in this country it is important to be aware of payment risks and take necessary measures to mitigate them. CGIC is continuously monitoring the political climate. No 116 вЂ“ May 2009 19 COUNTRY CREDIT RATINGS COUNTRY RATING TANZANIA 3C Tanzania is still among the largest recipients of aid. Over 34% of the national budget including the 2008/2009 financial year, heavily relies on donor support and that is likely to pose a big challenge for the implementation of the budget. Tanzania has cut its growth forecast for 2009 from 8% to 7.3% and postponed plans to sell its first sovereign bond as the global financial crisis curbs demand for its exports and pushes up borrowing costs. The global financial crunch and its ripple effects is putting the tourism and horticulture industries under pressure. CGIC has substantial exposure in this market with good underwriting experience. TOGO 3C After successful legislative elections in October 2007, missions from the EU, IMF and World Bank visited Togo to assess the financial state of the country and re-engage the country in after years of donor sanctions. The global financial crisis will lead to falling phosphate and cotton export revenues as well as lower remittances. Economic growth is estimated at 1.1% in 2008 and with the implementation of planned growthenhancing reforms, the economy could achieve real GDP growth of about 4% annually by 2011, with a gradually improving fiscal position. CGIC has limited exposure with favourable experience. UGANDA 3C Uganda is endowed with substantial natural resources like fertile soil, good rainfall and significant mineral deposits of copper, cobalt, gold and other minerals. Agriculture is the most important sector and contributor to GDP, with coffee exports accounting for most of the sectorвЂ™s export revenue. According to the countryвЂ™s Finance, Planning and Economic Development Minister, Uganda is already feeling the impact of the global financial crisis, despite the president insisting that the country will not be affected. Exports from tourism and remittances from abroad are expected to decline. CGIC has favourable experience and increasing exposure. ZAMBIA 3C Government has appealed to cooperating partners to enhance development assistance in light of the negative impact of the financial crisis on the local economy. Some industry players have taken this opportunity to downsize their operations and have trimmed their workforces. The global crisis is affecting ZambiaвЂ™s copper industry which employs 50,000 workers and accounts for 90% of ZambiaвЂ™s exports, as the price of the commodity has slumped on global markets with the economic crisis. Zambia has already been forced to abandon its windfall tax on copper mining, which was set at add $450m per year to its anti-poverty budget and is likely to see further budgetary pressures. CGIC has large exposures with recent experience being unfavourable due to claims being paid. HUNGARY 2B Although HungaryвЂ™s economy is not directly affected by the crisis in the US banking system, the resulting tightening liquidity will make it more difficult and expensive for Hungarian banks and businesses to borrow, leading to negative effects on exports and growth of the real economy. In October last year Hungary found itself particularly vulnerable due to its heavy debt burden and was the first EU member state to have sought a stand-by loan from the IMF since the financial turmoil in mid-2008. The Hungarian economy is forecast to contract 2.4% in 2009 compared to a contraction of about 1.4% estimated for 2008 due to a downturn in HungaryвЂ™s main export markets in Western Europe. The number of company liquidations in Hungary rose 17% y/y in 2008, including 32% y/y during the Q4вЂ™08. CGIC is open for cover in this market without any restrictions. TURKEY 2C The Economist expects that with the IMF support for the non-financial sector the country can avoid a severe economic crisis, although some of the countryвЂ™s smaller companies believe that the loan agreement would only put Turkey in debt once again; TurkeyвЂ™s debt has more than doubled from $220m when the ruling AK Party took office in 2002 to $500bn currently. The IMF expects the economy to shrink 1.5% in 2009 and to grow 3.5% in 2010. The culture and tourism minister stated that the tourism industry would be able to overcome the effects of the global economic crisis if it offers reasonable prices and a wellorganised promotion. The countryвЂ™s shipbuilding industry, which has grown exponentially in the last six years with orders from around the world, has sustained damages from a drop in global demand but a new stimulus package that aims to turn matters around will soon be introduced. CGIC is open for cover in this market without restrictions; however exporters should take the necessary precautions to manage their payment risk. MEXICO 2B President Felipe Jesus Calderon Hinokosa is expected to face a difficult environment in 2009 as the political focus shifting to the mid-term congressional elections in July 2009 will slow the pace of near-term momentum on his legislative agenda. A high level of violence stemming from organised crime represents a serious challenge to MexicoвЂ™s deficient security forces. Economists, financial entities and analysts predict a negative outlook for the economy this year, stating that it will suffer a marked recession due to the financial crisis; about 80% of MexicoвЂ™s exports are to the US. CGIC is open for cover on this market without any restriction. Mexico has, however, recently found itself in a bit of a crisis due to the devaluation of the currency coupled with the ongoing global economic crisis. As such any exporters in this market on open account should ensure that they have taken the necessary measures to protect themselves against any non-payment that may arise. 20 No 116 вЂ“ May 2009 OVERVIEW AND CGIC (Credit Guarantee) EXPERIENCE & COMMENTS RISK MANAGEMENT KIDNAPPING-FOR-RANSOM ON THE RISE K idnapping has become a global phenomenon and more of a concern than at any time in the past. вЂњThe kidnapping dynamics in any given country are everchanging and new hotspots are likely to emerge in 2009,вЂќ says Dave Butler, Director, Global Client Services at Control Risks. For many years, kidnapping-for-ransom was mainly associated with Latin America. But this has changed and the reports now also come from the swamps of the Niger Delta, the turbulent cities of Iraq and ships in the Gulf of Aden. Not only has the number of countries harbouring serial kidnap groups expanded, but so has the range of victim profiles and demands. Until 2004, Latin America accounted for more than 65% of the worldвЂ™s kidnaps-for-ransom. But the government subsequently implemented the so-called вЂ�Democratic SecurityвЂ™ policy, which sought to regain effective state control over large swathes of territory dominated by leftist guerrillas and rightist paramilitaries. вЂњIts success in curbing guerrilla activity was startling,вЂќ continues Butler. вЂњWithin two years of the policyвЂ™s implementation, the kidnapping rate had fallen by at least 50%. By 2008, Colombia was no longer among the worldвЂ™s top five kidnapping countries.вЂќ The global trend is upwards, driven by both political and criminal developments. In the aftermath of the US-led invasion of Iraq in 2003, Islamist extremists used kidnapping against foreign nationals, perhaps inspired by the kidnap and beheading of Wall Street Journal reporter, Daniel Pearl, in Pakistan in 2002. Similar developments took place in Afghanistan, where Taliban militants targeted aid workers and journalists. Such extremist cases have a triple purpose: to obtain some form of concession, whether political or financial; to draw international attention; and to exact revenge on the West. More recently, an organised militant movement has emerged in the Niger Delta kidnapping oil company workers and contractors in a bid to pressure foreign oil companies, and ultimately NigeriaвЂ™s government, to meet the groupвЂ™s demands on the sharing of oil wealth, compensation for environmental pollution and the release of detained militant leaders. вЂњThe shipping industry is suffering as pirates who were previously content to steal valuables and equipment now prefer to hold ships and their crews hostage, often for weeks on end,вЂќ says Butler. These shifts have clearly influenced kidnapping trends. By mid2008, only 43% of the worldвЂ™s kidnap-for-ransom cases were being recorded in Latin America. The number of countries outside Latin America regarded as having a serious kidnapping problem increased from four in 2003 to eight in 2008. According to Butler, while most demands remain financial, even among terrorist groups, political concessions now account for 4% of all cases, up from 1.5% in 2003. The percentage of deaths in kidnap cases has also increased. The number of reported piracy incidents involving kidnapping-forransom surged in 2008. Prior to 2007, pirate attacks were generally quick and centred on theft, with the vessel and crew only briefly held. But by 2008, pirates operating off Somalia realised the benefits of mimicking traditional kidnap-for-ransom. A spate of attacks took place where vessels and crew were taken hostage. Somali pirates are comfortable with protracted negotiations, usually with the vesselвЂ™s owners or crewвЂ™s employers, to obtain a substantial ransom payment, generally between $1m and $2m. International forces have been able to do little to stop them. Butler says that in Nigeria, militant and community groups that previously boarded oil rigs and held workers hostage in exchange for promises of jobs or compensation for environmental damage are now attacking vessels offshore and abducting the crews for ransom. The disruption caused to shipping business by such incidents, which can last for several weeks, is considerable, as are the implications for finances and employee welfare. вЂњAlthough the international community, through the UN, NATO and the EU, has latterly paved the way for joint patrols of the worst affected areas, particularly the Gulf of Aden, these efforts have yet to produce any tangible improvement and the outlook is not promising,вЂќ says Butler. Kidnap groups are widening the scope of their operations, e.g. many Colombian kidnap gangs have adapted to tougher policing in the country by moving to neighbouring Ecuador and Venezuela. According to Butler, a similar trend has been observed in Africa, fostered by porous borders and weak state security. Somali gangs have staged kidnaps in both Kenya and Ethiopia, and the activities of such groups in Algeria, Sudan and Nigeria have been felt in Tunisia, Egypt and Cameroon respectively. Militant groups are prepared to travel, particularly when high levels of insecurity in their home regions limit the number of potential foreign victims. вЂњIt looks as if this trend is set to strengthen in coming years and will need to be factored into security plans; even if a country appears to be at low risk, its border areas may be susceptible to infiltration from a higher-risk neighbour,вЂќ cautions Butler. In such a varied environment, it is important for companies to take the kidnap risk to their employees into account. This requires a good understanding of the regional variations and changing local dynamics underlying security issues such as kidnapping in each country of operation. Security managers will need to keep up to date with the main trends, groups and tactics, as well as the competence of the authorities and any legislation that might impede ransom negotiations in the event of a kidnap. вЂњArmed with such information, companies will be better prepared to take the necessary precautions to avoid an incident and to deal with one should it occur,вЂќ concludes Butler. No 116 вЂ“ May 2009 21 RSA Economic and Business Review APRIL 2009 Where to from here? Global stresses Both the global and domestic economies and their various constituents are frantically seeking for signs of any bottoming in the seemingly relentless plunge in demand and overall activity. The IMF reports that corporate default probabilities in the US are still below the peaks seen when the dot-com bubble burst in the early 2000вЂ™s; those in Japan have reached previous crisis levels while those in emerging markets have also risen strongly in recent months, most notably in South Asia and emerging Europe and Russia and were approaching previous peak levels. In Latin America, East Asia and China the risk of corporate default currently remains considerably below the levels seen in the aftermath of the late 1990вЂ™s crises. Allied to this is the fact that sovereigns are also under stress, especially emerging economies: вЂњamong the most affected have been countries with large external financing needs (for example, in emerging Europe), high risks of financial and corporate stress as credit booms are unwound (for example, in central Asia), and risks of widening fiscal deficits as commodity revenues plummet (for example, in some South American countries)вЂќ [IMF World Economic Outlook, April 2009]. Local cycle under strain Initial indications point to the ANC winning the 22 April elections resoundingly, providing them with a вЂ�clear mandateвЂ™. Much speculation has been circulating concerning possible policy shifts in the new ANC government. Hence the talk of a developmental state in which employment creation becomes paramount; in fact the SA Institute of Race Relations argues that GovernmentвЂ™s anti-poverty thrust will focus more on social spending and expanding the public works programme than on enabling unskilled people to enter the labour market. The 2009/10 National Budget provides for: (See chart below) The leading indicator appears to have peaked as far ago as March 2007 (at 127.2) while the coinciding indicator crested in June 2008 at 156.8. Barring the 40-month downturn over 1974-77, the previous two downward phases of 51 months (March 1989 вЂ“ May 1993) and 33 months (December 1996 вЂ“ August 1999) were the longest since WWII. For consumers it is worth noting that following the onset of the previous downturn, disposable income of households grew by just 0.6% and 1.5% in 1998 and 1999 respectively, while for businesses, the pressures on national income fed through in a scant 1.7% real rise in consumption expenditure by households in both of those years. 40.3% more people were sequestrated in 1999 than a year earlier while civil default and consent judgments against businesses grew 44.5% in 1999 to R1.32bn. Compiled by LUKE DOIG Senior economist, Credit Guarantee Over the past few years, larger than expected revenue receipts have given Minister Manuel latitude to grant above-inflation tax relief which in turn enabled the consumer-driver cycle to keep on turning. GovernmentвЂ™s response to the deepening recession has been to increase spending, both on capital projects but also through direct transfers such as social grants. This is argued to be justifiable in the face of looming job cuts and pervasive poverty. Well and good; a complimentary blend of expansionary fiscal policy together with looser monetary policy as the economy cools. Business cycle analysis has become something of a forgotten art given that we were in an upswing since before the new millennium began. If one considers the plunging industrial production and export figures being recorded as demand nose-dives across the globe, it becomes very difficult to see any salvation for the domestic economy coming from that front for quite some time. Faint hopes are being expressed that the various stimulus efforts around the globe may be helping to stabilize economies - let us indeed hope so, but hope may not be sufficient. The faint pick-up in the local leading indicator in February 2009 вЂ“ to 106.6 from 105.9 in January 2009 вЂ“ does appear to offer some faint hope that a recovery in the overall business cycle may become evident by year-end. Of the 13 indicators comprising the leading indicator, four are opinion surveys which represent a large qualitative component. The coinciding indicator is purely quantitative and this is still strongly downwards. 2007/08 2008/09 2009/10 Actual Revised est. Budget Gross tax receipts as % of GDP 28.9 28.5 28.0 Total expenditure as % of GDP 29.3 31.3 33.7 South Africa has numerous opportunities in the near term to showcase itself as a prime tourist and investment destination and hopefully we will grab the opportunity with both hands. Public sector infrastructural spend over the next three years of R787bn 2010/11 will amount to in excess of 9.5% of Budget GDP, significantly higher than the 5.9% of GDP achieved over the last 28.2 four fiscal years. 33.5 We may yet turn out to be a Real GDP growth in % 4.6 2.6 1.4 3.4 Budget balance as % of GDP 1.7 -1.0 -3.8 -3.2 22 beacon amidst the global fall-out, but itвЂ™s going to require level heads and strong leadership. CREDIT RISK MANAGEMENT From page 7 + the customer back to buy again thus gaining the most profitable sale, the repeat sale. Instead of offering a 2-10-N30 term a business can send out, along with an invoice, a VCDC; A Valued Customer Discount Certificate for 2% of the invoice amount and they can put the selling company's CEO's picture or the selling salesperson's picture on the certificate or Marilyn Monroe's picture. Each VCDC would carry the same # as the invoice it applies to and thus would be easy to track. Accredited Financial Services Provider #17691 THE BERNE UNION CLIENT CARE/NEW BUSINESS HOTLINE: 011 889 7365 The VCDC would clearly state that if the invoice the VCDC applies to is paid within 10 days of the invoice date the customer can use the VCDC on their next purchase. Visit our website at www.creditguarantee.co.za E-mail: #[email protected] If a customer pays in 15 days..cut them some slack and accept the VCDC...on that next most profitable purchase, the repeat. Gauteng: Telephone 011 889 7000 Credit Guarantee House, 31 Dover Street, Randburg P O Box 125, Randburg, 2125 Fax 011 886 1027 or 011 886 5715 Business development consultants: Nazel Veldtman Malcolm Kourie, Llewellyn Paulsen Service consultants: Jacky Mzobe, Tracey Dansie, Business researcher: Renate Janse van Rensburg Western Cape: Telephone 021 421 7830 No 1 Thibault Square, 1 Long St, Cape Town P O Box 6018, Roggebaai, 8012 Fax 021 419 7586 Business development consultants: Claire Marx Willie van den Berg Service consultant: Danie van Niekerk Business researcher: Marita Procter The end result? Improved cash flow and repeat sales. All too often we walk a mental rut, we do the same things over and over again in the same way, until the rut becomes a mental trench and then we think we can see the horizon for oncoming danger when in effect all we really see is a wall. And that's not to say that a trench can't be comfortable and easy to navigate, but God help you if things change and the walls give way. During this time of dropping sales and extended delays in credit customers' payments, an old idea is reborn and to those with the courage and sense to take advantage go the spoils, i.e. improved cash flow and more repeat sales. In the last 10 years, Abe WalkingBear has spoken to hundreds of CEO's and top manager groups internationally. Since entering the training and consulting field in 1982, he has revolutionized the way that business owners, CEO's and senior managers think of and manage one of, if not, their largest assets. He is also the co-founder of www.profitinnercircle.com During his career he has worked with many companies across industry lines, he has taught in schools and universities, is the author of Profit Centered Credit and Collections with Touchstone 2000, 1999, co-author of the STAFDA's Foundations of A Business 2007, and co-author of the international best selling book The Best Kept Profit Secret: The Executive's Guide to Transforming a Cost Center. Eastern Cape: Telephone 041 363 4024 First Floor, Mutual Place, cnr Cape Rd & Langenhoven Drive, Greenacres, Port Elizabeth P O Box 27154, Greenacres, 6057 Fax 041 363 3750 Sales & service consultant: Nici Large Business researcher: Brenda McEwan Kwazulu/Natal: Telephone 031 265 0300 Suite 7, No 4 The Crescent, Westway Office Park, Westville P O Box 2756, Westway Office Park, 3635 Fax 031 265 0323 Sales & service consultant: Lorraine Abbott Business researcher: Andrew Reed WalkingBear has written hundreds of business articles and has been a featured speaker at numerous company business meetings and association conventions. CREDIT NOTES is published by Credit Guarantee Insurance Corporation of Africa Ltd, (Reg No 1956/000368/06), PO Box 125, Randburg, 2125. For subscriptions and information, please contact Vicki Sokolich at tel 011 889 7281, fax 011 686 9581 or e-mail at [email protected] . He was given the Vistage Master Speaker Award (the world's largest CEO organization) for having spoken to over 200 CEO groups in the US, Canada and Europe. A high energy and fast paced speaker, WalkingBear uses wit and humor to keep his audiences engaged and learning. A Vietnam War veteran and of Pueblo Native American descendant, WalkingBear's family is originally from the Taos area. Credit Guarantee does not necessarily endorse opinions expressed in this publication. Although all reasonable care is taken to ensure the correctness of facts and figures, Credit Guarantee accepts no responsibility for the results of actions based on anything published in this issue. He is now living in Canon City,Colorado. www.abewalkingbear.com [email protected] 719.276.0595 Design & layout: MALNOR (Pty) Limited 2 Hermitage Terrace, Richmond, Johannesburg Private Bag X20, Auckland Park, 2006 Tel: 011 726 3081/2 вЂў Fax: 011 726 3017 e-mail: [email protected] вЂў Website: www.malnormags.co.za No 116 вЂ“ May 2009 23в‡ 15034 C/Notes 05/2009