EUROPEAN COMMISSION Brussels, 1.12.2017 SWD(2017) 435 final COMMISSION STAFF WORKING DOCUMENT Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on guarantees covered by the general budget - Situation at 31 December 2016 {COM(2017) 721 final}



Table of Contents 1.Introduction 2.Overview of capital loan operations covered by the EU guarantee 2.1.Loan operations covered by the EU budget guarantee 2.1.1.EU loan operations to Member States 2.1.2.EU loan operations to non-Member States 2.1.3.Guarantees given to the EIB 2.2.Cumulative and annual EU budget guarantee exposures 2.3.1.EU loans operations to Member States 2.3.2.EU loans operations to non-Member States 2.3.3.Guarantes given to the EIB 2.4.Payment under the EU budget guarantees 2.4.1.EU loan operations 2.4.2.Guarantees given to EIB 2.4.3.Default interest penalties for late payment 3.Country-risk evaluation 3.1.Member States 3.1.1.Bulgaria 3.1.2.Hungary

3.1.3.Ireland 3.1.4.Latvia 3.1.5.Portugal 3.1.6.Romania 3.2.1.Former Yugoslav Republic of Macedonia 3.2.2.Montenegro 3.2.3.Serbia 3.3.Potential candidate countries 3.3.1.Albania 3.3.2.Bosnia and Herzegovina 3.4.ENP countries 3.4.1.Armenia 3.4.2.Ukraine 3.5.Mediterranean partners 3.5.1.Egypt 3.5.2.Morocco 3.5.3.Syria 3.5.4.Tunisia 3.6.Other countries 3.6.1.Brazil

3.6.2.South Africa 1.Introduction This working document is published in parallel with the report of the Commission to the European Parliament and the Council on guarantees covered by the EU budget at 31 December 2016. It provides further information on the risk borne by the EU budget related to Member States and third countries. An overview of the outstanding amount of loans covered by the EU budget under each programme is presented in section 2. Countries representing significant risks to the EU budget and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external debt situation, are included in the country risk evaluation in section 3. The evaluation comprises short analyses and tables of risk indicators. Data concerning EU loans are processed by the Commission whereas EIB (“the Bank”) figures have been provided by the Bank. The evaluated countries are grouped in 6 sub-sections: (3.1.) Member States, (3.2.) Candidate countries, (3.3.) Potential candidate countries, (3.4.) ENP countries, (3.5.) Mediterranean partners and (3.6.) Other countries. 2. Overview of capital loan operations covered by the EU guarantee The graph hereunder shows the breakdown of outstanding amounts by financial instrument. Each financing facility is detailed in the sections below.

Table A1 shows the outstanding amount of capital in respect of borrowing and lending operations for which the risk is covered by the EU budget. The figures show the maximum possible risk for the EU for these operations and must not be read as meaning that these amounts will actually be drawn from the Guarantee Fund for external actions ("the Fund") or the EU budget. Accordingly, the relevant amounts are not registered as expenditure in the EU budget; rather they are formally recorded pro memoria only.



2.1.Loan operations covered by the EU budget guarantee The EU budget covers three types of operations. These are: 2.1.1.EU loan operations to Member States The outstanding risk of these operations is covered by the EU Budget. They relate to BOP, EFSM and to borrowing and lending granted to certain Member States prior to their EU accession under, Euratom (table A2a) and EIB guaranteed financing operations (table A3). 2.1.2.EU loan operations to non-Member States These operations are covered by the Fund. They relate to MFA, Euratom (Table A2b) and EIB guaranteed lending operations to third countries or Member States before accession to the EU (table A3).

2.1.3.Guarantees given to the EIB The EU provides a guarantee in respect of financing granted by the EIB under the external mandates. The guarantee given to the EIB depends on the Mandate under which the loans are granted. The EU guarantee is limited as detailled below : - 75% of the total amounts of loans signed in the Mediterranean countries based on the Mediterranean protocols of 1977 and Council Regulations 1762/92/EEC and 1763/92/EEC; - 70% of the total amounts of loans signed as part of lending operations with certain nonMember States authorised by Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC; - the 65% guarantee rate covers three different mandates: · · 2.2.Cumulative and annual EU budget guarantee exposures With the amortization profile based on the existing loans disbursed, it is possible to calculate the total capital exposure of the EU budget and the total capital and interest payments due to be received each year. The following table A4 includes the estimated amount of principal and interest due each financial year by each country according to disbursements made until 31 December 2016 . Data related to Member States are highlighted in yellow in the next table.

2.3. Evolution of risk The evolution of risk corresponds to the schedule of the total annual repayments (amount in capital including interests due) under all financial instruments covered by the EU budget. In case of loans to Member States, the risk is directly covered by the EU budget. Regarding loans to third countries, the risk is covered in the first instance by the Guarantee Fund for external Actions. The weight of EFSM (57% of the total oustanding including accrued interest) clearly highlights that most of the risk is nowadays directly borne by the EU budget, whereas before the financial crisis, EIB loans to non-Member States made up the highest exposure via the Guarantee Fund for external Actions.

2.3.1.EU loan operations to Member States In 2016, Member States represented 64.4% of the EU budget exposure (cumulated total risk borne by the EU budget, see table 1 above) with the following breakdown between the financial instruments:

Graph A1: Total annual risk borne by the EU budget (EUR million) related to Member States at 31.12.2016 for the period 2017-2023 (based on amortization plans of existing loans) As Graph 1 illustrates, the main risk for the EU budget is linked to EFSM loans, which represent 88.5% of the total outstanding of Member States. 2.3.2.EU loan operations to non-Member States In 2016, non-Member States represented 35.6% of the EU budget exposure (cumulated total risk borne by the EU budget, see table 1 above) with the following breakdown between the financial instruments: Graph A2: Total annual risk borne by the EU budget (EUR million) related to non-Member States at 31.12.2016 for the period 2017-2023 (based on amortization plans of existing loans) As graph A2 illustrates that the weight of MFA and Euratom loans are marginal in the total annual risk in comparison with the EIB loans granted (these amounts include loans signed and disbursed under all EIB mandates). 2.3.3.Guarantes given to the EIB 94.6% of the 2007-2013 EIB external Mandate has been signed but an amount of EUR 8,743 million still remains to be disbursed within 10 years from the end of the Mandate. The 2014-2020 Mandate covers EIB financing operations to be signed during the period from 1 January 2014 to 31 December 2020. Risk factors: a) Factors increasing the risk: ·the interest on the loans must be added to the authorised ceiling;

·an additional factor to be considered is that some loans are disbursed in currencies other than the EUR. Due to exchange rate fluctuations, the ceiling may be exceeded when the amounts disbursed are converted into EUR at the year end. b) Factors reducing the risk: ·the limitation of the guarantee given to the EIB; ·operations already repaid; ·the ceilings are not necessarily taken up in full; ·in some cases, notably private sector operations, the EU budget guarantee covers only well defined political risk events, with the EIB (or a third party guarantee) covering other risks (e.g. commercial). 2.4.Payments under the EU budget guarantees The EU borrows on the financial markets and onlends the proceeds to Member States (BOP, EFSM) and to third countries (MFA) or nuclear sector companies (Euratom). Procedures have been set up to guarantee the repayments of the borrowings due by the EU and also the guarantees given in connection with the EIB financing operations. 2.4.1.EU loan operations The loan repayments are scheduled to match the repayments of the borrowings due by the EU. If the recipient of the loan is in default, the Commission will first draw on its own cash resources to ensure a timely repayment of the EU borrowing on the contractual due date. Should the amounts needed for the necessary cash coverage exceed, for a certain period or date, the available treasury funds of the Commission, the Commission would, in accordance with in accordance with Article 14 of Council Regulation 609/2014 , draw on additional cash resources from the Member States in order to fulfil its legal obligations towards its lenders. In the case of BOP loans, where amounts to be reimbursed can be very high, the beneficiary Member States are required to transfer the amounts due to the European Central Bank seven business days in advance of the contractual due date. This gives enough time for the Commission and Member States to provide for the cash advance to ensure timely repayment in case of default. The same process applies for the EFSM loans with 14 days lead time. In a second step, the treasury situation would be regularised as follows: BOP and EFSM loans a)The Commission may need to propose a transfer or an Amending Budget to budget the cash advance under the corresponding budget line "01 02 02 European Union guarantee for Union borrowings for balance-of-payments support" or "01 02 03 European Union guarantee for Union borrowings for financial assistance under the European financial stabilisation mechanism". b)The recovered funds will be re-paid to the EU budget. Euratom and MFA loans a)If the payment delay reaches three months after the due date, the Commission draws on the Fund to cover the default and to replenish its treasury. b)The Commission might also need to draw on the EU budget, most likely by means of a transfer, to provide the corresponding budget lines under articles "01 03 04 Guarantee for Euratom borrowings to improve the degre of efficiency and safety of nuclear power stations in third countries" or "01 04 03 Guarantee for Euratom borrowings" or "01 03 03 European Union Guarantee for Union borrowings for macro-financial assistance to third countries" with the necessary appropriations needed to cover the default. This method is used when there are insufficient appropriations in the Fund or if the borrower is a Member State and the transfers are likely to require advance authorisation by the budgetary authority.

c)The recovered funds may either be kept on the Fund account (the next annual provisioning from the EU budget being reduced accordingly) or re-paid to the EU budget. 2.4.2.Guarantees given to EIB The EU provides a guarantee in respect of financing granted by the EIB under the external mandates. When the recipient of a guaranteed financing fails to make a payment on the due date, the EIB asks the Commission to pay via the Fund the amounts owed by the defaulting entity in accordance with the relevant guarantee agreement. The guarantee call must be paid within three months of receiving the EIB's request, either from the Fund or directly from the EU budget should the resources of the Fund be insufficient. The EIB administers the loan with all the care required by good banking practice and is obliged to seek the recovery of the payments due after the guarantee has been activated. 2.4.3.Default interest penalties for late payment a)EU loans -For loans granted by the EU, default interest is owed by loan beneficiaries for the time between the date at which cash resources are made available by the EU budget and the date of repayment to the EU. b)EIB loans -For EIB loans, EIB is entitled to default interest which is calculated during the period between the due date of a defaulted loan instalment and the date of receipt of the cash resources by the EIB from the Commission. From the latter date, default interest is due to the Commission. 3.Country-risk evaluation Countries benefitting from EU loans and/or representing important risks to the EU budget, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation, are included in the country risk evaluation. The evaluation presented below comprises short macroeconomic analyses and tables of risk indicators. The evaluated countries are grouped in 6 sub-sections: (3.1.) Member States, (3.2.) Candidate countries, (3.3.) Potential candidate countries, (3.4.) ENP countries, (3.5.) Mediterranean partners and (3.6.) Other countries.

Explanatory notes for country-risk indicators Countries are rated on a scale of zero to 185 or to 100 (the number of countries has been reduced from 185 to 100 from January 2011). 185, respectively 100, represents the highest risk of default. A given country may improve its rating and still fall in the ranking if the average global rating for all rated countries improves. The higher the ranking number, the lower the creditworthiness of the country. Abbreviations used in tables S&P: Standard and Poor's FDI: Foreign Direct Investment GD: Gross Domestic Product CPI: Consumer Price Index

est.: Estimates m EUR: EUR million n.a.: not available



3.1.Member States 3.1.1.Bulgaria Economic growth remains robust and is estimated at 3.3% in 2016, following a strong growth performance in 2015 with 3.6%. Private consumption growth was the main growth driver, while net exports also made a positive contribution. GDP growth is projected to slightly taper off to 2.9% and 2.8% in 2017 and 2018, respectively, with strong domestic demand as the predominant growth driver. Risks to the growth outlook are tilted to the downside and include a slower-than-expected absorption of EU funds, weaker external conditions as well as political uncertainty related to the upcoming elections. Annual inflation was negative in 2016, but is expected to reach 0.8% in 2017 due to strong domestic demand, rising prices for processed food as well as recovering energy prices. Labour market conditions have significantly improved during the economic recovery with an unemployment rate forecast at 7.1 % in 2017. The government budget balance and debt indicators moved well below the underlying benchmarks of the EU stability and growth pact. Fiscal consolidation continued in 2016 with the public deficit estimated to have decreased from 1.7% in 2015 to 0.4% of GDP in 2016. In particular, both tax revenue increases and public investment reductions were the key drivers of the adjustment. For 2017, the general government deficit is forecast slightly higher at 0.5% of GDP. Increases in social security contributions are expected to lead to higher revenues, but expenditure growth is forecast to outpace revenue growth, mainly as a result of increases in the public wage bill and public investment. The general government debt in 2016 is estimated at 29% of GDP and forecast to decline in 2017 and reach 26% of GDP in 2018 as a result of the improved fiscal performance and public debt financing conditions. Contingent liabilities of state-owned enterprises pose downside risks to public finances, while the fiscal performance might also be influenced by political uncertainties and potential changes in policy priorities. 3.1.2.Hungary After a deep double dip recession, a steady recovery started in Hungary in early 2013. The rebound was helped by a modest recovery in Europe and a strong pick-up in EU-funded investment. More recently, economic growth was driven by private consumption and net exports supported by improved cost competitiveness, but in 2016 – with the end of the 2007-2013 Multiannual Financial Framework – EU funds and thus investment declined significantly. In 2016, the Hungarian economy grew by 2.0 %, down from 3.1 % in 2015. Headline inflation has remained around zero since 2014 as falling energy prices fully offset the limited inflation in services and food. Core inflation, which excludes energy and unprocessed food prices, remained stable at around 1.3 %. The unemployment rate fell to around 5 % in 2016. The employment rate has increased significantly since the recovery started in 2013, while activity rates have been steadily increasing since 2008. Employment reached 4.4 million in 2016, supported also by the public works scheme, which employed approximately 220 000 persons on average in 2016. Private sector job creation amounted to around 130 000 in the same year, bringing full-time equivalent employment in the domestic private sector close to its pre-crisis level. The trade balance surplus of goods and services increased to over 10% of GDP in 2016 from 8.9% in 2015. At the same time, the combined current account and capital account surplus is expected to have declined below 2.0% of GDP in 2016 reflecting the low absorption of EU funds. From its peak level of close to 81 % in 2011, the public debt-to-GDP ratio is estimated to have declined to below 74.1 % by 2016. The pace of debt reduction received an impetus from the takeover of mandatory private pension assets by the State. More recently, debt reduction benefited also from economic recovery and declining interest rates. In parallel, the primary deficit turned into a surplus (of around 2 % of GDP between 2012 and 2015). However, the structural primary balance is forecast to move into deficit in coming years reflecting the estimated widening of the positive output gap. This poses some risk for Hungary's debt reduction path. Public debt is still high for a middle-income economy, but sovereign financing risks have been considerably reduced since the crisis years. On the basis of the Commission's short-term risk indicator, the country faces a low risk of immediate fiscal distress. This is also confirmed by the recent upgrades of the country's sovereign risk ratings. The maturity structure of debt has improved. The initially high proportion of foreign exchange-denominated public debt has been decreasing, supported by the central bank's self-financing programme. 3.1.3.Ireland After a mixed picture in the first half of 2016, Ireland’s economy performed better in the third quarter. The headline figures were driven up by the activities of some multinational companies in the country. However, domestic activity also grew in Q3-2016, with core domestic demand up by 3.4 % on the year. GDP is expected to have grown by 4.3 % in 2016 and it is forecast to decelerate over the forecast horizon but remain brisk amid heightened risks and an uncertain global backdrop. Domestic demand is expected to remain the main driver of the economy supported by the improving labour market. The unemployment rate declined to 7.9 % in 2016 despite an increase in the labour force and net inward migration, and is forecast to further fall in the next years. Annual harmonised consumer prices (HICP) dropped by 0.2% in 2016. Banks’ asset quality is improving and profitability is recovering but remains fragile. A number of factors continue to drag on bank profitability. These include the high stock of non-performing loans and low yielding tracker mortgages, weak credit demand, difficulties in accessing collateral, and continued pressure on net interest margins. The NPL ratio for domestic banks fell to 14.2 % in Q3-2016 , down from a peak of 27.1 % at the end of 2013. The share of arrears in the total mortgage balance remains high at 14 %. New lending is growing only gradually, with measures in place to ensure it is prudent, however net lending for both households and companies remains negative. The general government deficit is estimated to have fallen to 0.9 % in 2016 from 1.9% in 2015. On a cumulative basis, on the revenue side, tax receipts increased by 5% in 2016, mainly on the back of the strong performance of corporate tax (+7%) and excise duties (+7.9%). The sovereign’s financing situation remains healthy. Gross public debt is expected to have declined to 75.1% in 2016 from 78.6% in 2015 and to further decline gradually contingent on moderate yet robust GDP growth. The sale holdings in the domestic banks could accelerate debt reduction further. According to the most recent assessment, the government stakes in the three major domestic banks is valued at about EUR 13 billion (around 5.1% of GDP). However, subdued bank profitability could further hinder government plans for early sales. Additional cash over the medium term can be expected from surpluses arising from the closing operation of the National Asset Management Agency and the Irish Banking Resolution Corporation.

3.1.4.Latvia In 2016 GDP, growth is expected to have been subdued in Latvia (+1.6% after +2.7% in 2015). While private consumption and exports remained strong, investments plummeted. In particular, delays in the implementation of EU-funded projects, related to the changeover to a new programming period, had a marked impact in the construction sector. Inflation as measured by the harmonised index of consumer prices (HICP) remained subdued at 0.1% after 0.2% in 2015. This low rate was driven by falling energy prices while non-energy prices hovered closer to 2%. With energy prices projected to rise again, the inflation is forecast to return to its 2% target. The trade deficit has been increasing in volume terms as domestic demand outpaced external demand. As a consequence, trade weighed on growth in 2016 (-1.0% in 2016 after +0.3% in 2015). In nominal terms, low energy prices on the import side brought the current-account close to balance in 2016 (-0.1% of GDP after -0.8% in 2015). However, higher energy prices are expected to lead to a current-account deficit of 3.3% by 2018. Employment declined slightly, in particular due to a contraction in the construction sector. Nevertheless, the unemployment rate gradually declined in 2016 to 9.5% (against 9.9% on average in 2015), as Latvia suffers from adverse demographic dynamics negatively affecting its labour force. The general government budget is estimated to have reached a balanced position in 2016 against a deficit of 1.3% of GDP in 2015. This improved deficit is due to both improved tax revenues and lower public spending (incl. investment). At the same time, the government debt-to-GDP ratio has increased from 36.3% of GDP in 2015 to 39.4% in 2016, as debt repayments were pre-financed. As a result, the debt ratio is expected to decline to around 35% of GDP in 2018. The well-established access to bond markets, combined with the low interest rate environment and the sound fiscal performance and solid growth expectations, lead to the overall assessment of very low debt refinancing risks for Latvia. 3.1.5.Portugal The economic recovery of the Portuguese economy slowed down slightly to a preliminary estimated growth of 1.4% in 2016 relative to 1.6% in 2015. This was due to a weaker performance in the first half of the year while growth picked up again in the second half, helped by a strong expansion in tourism. The Commission's Economic Sentiment Indicator has improved substantially over the past months and together with the latest favourable data on industrial output, services and retail trade set a broadly favourable outlook for the economic growth in 2017. Investment is estimated to have declined in 2016 as bank lending remains relatively weak and the inflow of EU funding suffered a temporary drop after the switch to the new programming period. Nevertheless, the expected gradual recovery in bank lending and the projected rebound in EU co-financing are set to support strongly investment growth over the forecast horizon. Improving net incomes in the corporate sector are also set to push up investments. Private consumption retained a growth rate of about 2% in 2016 fuelled by rising household income and a rebound in consumer lending. Consumption is forecast to decelerate slightly in 2017 but is nevertheless set to remain a key contributor to the overall economic growth. In the external sector, the strong tourism performance improved the Portugal's export market share in 2016 and the positive carryover from the second half of the year is likely to keep the market gains in 2017. The labour market continued to improve markedly in 2016 as unemployment fell to 10.2% at the end of the year, down by 2pps from a year earlier. Job creation remained strong for a third year in a row as employment increased by 1.3% in 2016. Inflation (HICP) increased marginally to a yearly average of 0.6% in 2016. The recent dynamics in oil prices are set to push up inflation further over the forecast horizon in line with the projections for the average inflation in the euro area. General budget deficit is estimated to have dropped to 2.3% of GDP in 2016 (2.6% net of one-offs) from 4.4% in 2015 (3.1% net of one-offs). Both the headline and structural budget deficits are expected to remain below 2.5% of the GDP in 2017 supported by the moderate economic growth while the impact of structural measures is expected to be broadly neutral. The general government debt is estimated at 130.5% of GDP at the end of 2016 and is forecast to drop slightly in 2017. Standard debt sustainability analysis indicates stabilisation of the debt-to-GDP ratio at around 124% of GDP in the medium run. However, debt dynamics are vulnerable to adverse shocks, in particular shortfalls in nominal growth and increase in interest rates. The high level of government debt and the resulting interest expenditures of about 4.5% of GDP impose a high burden on public finances. Yields on the government 10-year bonds meanwhile grew to around 4.2% at the beginning of 2017 posing further pressure on debt refinancing costs. However, the yields on short-term debt have been relatively stable and overall the average interest rate on newly issued debt has remained below the one for outstanding debt. This has allowed Portugal to continue its early repayments to the IMF. As a result, the outstanding debt to the IMF dropped to EUR 16.4bn at the end of 2016 from initially disbursed EUR 28.7bn. The outstanding debt to EFSM stands at EUR 24.3bn and repayments are expected to start in 2026. 3.1.6.Romania GDP growth continues to be strong (4.8% in the first nine months of 2016, after 3.9% in 2015). Inflation is low (-1.1% on annual average in 2016). Unemployment is approaching pre-crisis lows at 6.0% in 2016 and continues to fall. The current account deficit is widening (from 1.1% of GDP in 2015 to 2.2% of GDP in 2016). GDP growth is expected to remain strong in 2017, at 4.4%, largely driven by consumption. The current account deficit is forecast to widen further to 2.9% in 2017 and 3.1% in 2018. Inflation is slowly picking up and is expected to reach 1.6% in 2017 and 2.9% in 2018 as the base effect of the substantial VAT cuts in 2015 and 2016 fades out. The output gap is estimated to have closed in 2016. Romania reached its medium-term objective (MTO) of 1% of GDP in structural terms in 2014 and remained below the MTO in 2015 (structural deficit of 0.6%). However, the government was targeting a deficit of 2.8% of GDP in 2016, departing from its commitments under the Stability and Growth Pact and from national legislation. The budgetary outturn for 2016 will be published in spring. The Commission projects in the winter 2017 forecast a headline general government deficit of 3.6% of GDP in 2017. The structural deficit is projected to deteriorate from around 2 ½ % of GDP in 2016 to almost 4 % of GDP in 2017. This deterioration reflects a package of significant tax cuts and public-sector wage increases approved by the parliament in the course of 2015 and 2016 as well as additional tax cuts and increases of public wages and social spending enacted since the December 2016 elections. The 2017 budget law, adopted at the beginning of February, contains a deficit target of 2.96% of GDP in cash and 2.98% in ESA terms. However, this projection seems overly optimistic, in particular due to macroeconomic assumptions, optimistic revenue projection and not-specified savings in current expenditure. 3.2. Candidate countries 3.2.1.Former Yugoslav Republic of Macedonia The economy remained resilient in 2016 amidst a protracted political crisis and sluggish investment. GDP growth in the first three quarters of 2016 amounted to 2.7% y-o-y. It was driven by a surge in private consumption, supported by robust increases in disposable income and a benign price environment. Exports, fuelled by enhanced production capacities of foreign companies, also provided an important contribution to the expansion. However, negative confidence effects from the enduring political crisis restrained private investment, and credit growth to corporates was almost flat. The government, too, reigned in capital expenditure, mainly as a result of mid-year budget rebalancing, but also on account of constraints from the domestic political situation. Consumer prices dropped for the third consecutive year, propelled by lower food, energy, transport and housing and utilities costs. The core inflation rate remained positive. Challenges from the external sector remain contained. The current-account deficit increased markedly in 2016 compared to one year earlier, amounting to some 3% of projected full-year GDP. The shortfall in the primary balance became more acute, and private transfer inflows slowed down. The merchandise trade balance widened slightly, benefitting from low price pressures from fuel imports. Net FDI inflows increased some 65% y-o-y, amounting to some 3.5% of projected full-year GDP, and more than covering the current account deficit. Foreign exchange reserves declined in the first half of the year but recovered after the July Eurobond issuance (450 mil.) and, at end-2016 were some 16% higher than one year earlier, comfortably covering over 6 months of prospective imports. Gross external debt stood at 74.4% of GDP at the end of the third quarter, some 5.5pps higher than at end-2015, mainly as a result of foreign borrowing by the public sector. Three quarters of external debt is long-term, hence reducing refinancing risks. Some 80% of foreign debt is denominated in Euro. Budget execution remained weak in 2016. The government continued providing a fiscal stimulus to the economy throughout 2016, mainly through a marked rise in social transfers. Revenues increased by 5% over 2015, although still underperforming compared to the revised budget. The government resorted to two supplementary budgets over the summer, necessitated by a downward revision of growth, and by compensation for flood victims, respectively. These raised the deficit target to 4% from originally 3.2%, and increased budgeted current spending by 0.7% of GDP, while lowering revenue projections and capital expenditure. There was marked under-execution of capital expenditure (75% of budget, or 2.9% of projected 2016 GDP), in part as a result of legal restraints to capital spending imposed by the complex political situation, but also, as these fell prey to ad hoc pressures from current spending and from revenues. The fiscal deficit outcome likely remained below the revised target, amounting to some 3% of projected full-year GDP.

3.2.2.Montenegro Economic growth decelerated in 2016 dampened by a surge in investment-related imports. GDP growth was 2% y-o-y in the first three quarters of 2016, halving from 4% growth a year before. All components of domestic demand provided a positive contribution to output expansion with gross fixed capital formation remaining the main driver. However, net exports had a negative contribution to growth as imports, driven by the high import content of large infrastructure investments, surged by 16% y-o-y. After several months of price contraction, inflation rebounded in the last three months of 2016, to reach 0.9% annual growth in December. Price developments were driven by the rebound of global oil and food prices. Despite economic growth, the unemployment rate remained high at 16.9% in September 2016. The overall credit activity of the banking sector appears to be improving gradually and the non-performing loans ratio declined to 10.3% as of end-December 2016, down from 13.4% a year earlier. However, lending to the non-financial business sector remains weak. The current account deficit increased substantially as investment activity intensified. In 2016, the deficit grew to 19% of GDP, up from 13% in 2015, reflecting the 33% rise in investment and its high import content given the narrow production base. The surplus in the balance of services (mostly driven by tourism) could not offset the faster expansion of the merchandise trade deficit. Net FDI inflows remain the main source of external financing, accounting for 10% of GDP, although debt-related financing has also picked up. The budget deficit declined in 2016 driven by significant underspending on capital investment. The central government budget deficit amounted to 3.5% of GDP in 2016, down from 8.4% a year before. However, despite an increase in budget revenue (by 4.5% above the plan), current expenditures rose much faster (by 11% above the plan) due to significant increases in public wages and social benefits. In 2016, the public debt reached 64.3% of GDP, of which, 83.4% accounted for external debt. 3.2.3.Serbia In 2016, the economy expanded faster than expected and surpassed its pre-crisis peak. Growth was driven mainly by investment and exports and accelerated to an estimated 2.8%. External imbalances have narrowed further and the current account deficit is estimated to have shrunk to around 4% of GDP. Net FDI inflows increased slightly over the previous year to EUR 1.9 billion, and covered 136% of the current account deficit. Inflation was stable and at historically low levels, averaging 1.1% and undershooting expectations and the central bank target tolerance band. The low inflationary pressure and strong fiscal consolidation helped tame inflation expectations and supported further reductions in the key policy rate of the central bank from 4.5% in the beginning of 2016 to 4% in July 2016. Fiscal consolidation has been very strong and the consolidated budget deficit is estimated to have fallen to 1.4% of GDP in 2016. This outcome was significantly better than initially expected, mainly as a result of over-performance on the revenue side. The medium term budget framework targets further reduction of the deficit to 1.0% of GDP in 2019. Government debt has stabilised at an estimated 74% of GDP at the end of 2016. The dinar had remained broadly stable against the euro throughout most of the year. In order to ease excessive daily volatility of the exchange rate, however, the central bank remained active, intervening on both sides of the market selling a net EUR 120 million. Balance of payment flows have continued to support a relatively high level of central bank foreign exchange reserves, which stood at EUR 10.2 billion by the end of the year, covering more than six months’ worth of imports of goods and services. The 36-month precautionary Stand-By Arrangement with the IMF has remained on track and the Executive Board of the IMF completed the sixth review in December. Serbia's sovereign rating improved in 2016: S&P and Moody's increased their perspectives, while Fitch raised Serbia's rating from B+/positive to BB-/stable. 3.2.4. Turkey Economic growth strongly lost momentum in 2016. GDP growth went from +6.1% y-o-y in 2015 to -0.8% in the first three quarters of 2016. The deceleration was the strongest in the third quarter and for the demand categories net trade, due to a drop in tourist arrivals, and private consumption. Loan growth has been high in the corporate sector. Non-financial corporations have seen their liabilities surge from 30% of GDP in 2007 to over 60% in 2015 with about 45% of this borrowing in foreign currency. In important sectors like tourism, construction and manufacturing the stability of the NPL ratio is a consequence of high loan growth off-setting high growth of non-performing loans. Notwithstanding the output gap, which is estimated by the central bank to be negative and which it expects to close only in 2018, inflation has been above the central bank's end-of-year target range (5% +/- 2 pps.) for five years. In response to the accelerating depreciation of the Lira towards the end of 2016, the central bank raised the weighted average cost of funding by about 200bps. The Lira has subsequently appreciated but the exchange rate vis-à-vis the euro and the US dollar continues to be volatile. The current account deficit declined from 4.5% to 3.7% of GDP in 2016 under the new national accounting methodology. Still the assessment of the external imbalances does not change materially. The large negative current account deficits of the past have led to a further deterioration of Turkey's already highly negative Net International Investment Position (NIIP). Its NIIP is one of the largest among emerging market economies at about 41% of GDP at the end of 2016, reflecting foreign liabilities to the tune of 66% of GDP and assets abroad totalling 25% of GDP. Gross external debt, as reported by the IMF, stood at 46.3% of GDP in 2015 according to the new figures. Foreign currency reserves stood at USD 106.1 bn in December 2016 (12.4% of GDP). The only investment inflow to register an increase when comparing end 2016 with end 2015, was other investment. Government bonds lost their last investment grade rating on 27 January. The last rating agency to cut Turkish government bonds' status to junk, Fitch, gave political and security risks undermining economic performance and institutional independence as explanation. At the same time, the current headline figures for fiscal stability are solid with government debt amounting to 27.5% of GDP and a budget surplus of 1.3% of GDP in 2015 according to Turkstat's revised national accounting methodology. 3.3.Potential candidate countries 3.3.1.Albania Economic growth has remained on an upward trajectory in 2016. GDP growth increased to 3.3% y-o-y in the first three quarters, up from 2.6% in 2015. All components of domestic demand provided a positive contribution to output expansion with gross fixed capital formation remaining the main driver. Exports and imports expanded at similarly high rates, but since the level of imports continued to exceed the level of exports by a significant margin, net exports subtracted from GDP growth. Reflecting still below-potential economic activity, the annual rate of inflation declined to 1.3% in 2016, undershooting the Bank of Albania’s target of 3% for the fifth consecutive year. The central bank stepped up monetary easing by cutting its policy rate to a new historic low of 1.25% in May. However, the pass-through of monetary stimulus continued to be hampered by weak bank lending to the non-financial business sector in the context of a sizeable overhang of non-performing loans (18.2% of total gross loans in December).

The current account deficit has widened again in response to stronger domestic demand. In the four quarters to September 2016, the deficit corresponded to 11.2% of GDP, up from 10.8% in 2015. Net FDI inflows remained the main source of external financing covering two thirds of the current account deficit in the year to September. Official foreign reserves have remained relatively stable amounting to EUR 2.7 billion at the end of the third quarter (equal to 6.6 months of imports of goods and services). The stock of gross external debt was up by 6.6% y-o-y at the end of the third quarter, corresponding to 73.7% of GDP. Long-term debt, mostly owed by the government, makes up 80% of the total. The fiscal deficit of general government continued to narrow. The deficit is estimated to have equalled 1.7% of GDP in 2016, compared to 4.1% in 2015. The lower deficit was the combined result of strong revenue growth (9.3% year-on-year) and modest expenditure growth (2.9% year-on-year). Public debt (including guarantees) declined from 72.7% of GDP at the end of 2015 to 71.0% of GDP at the end of 2016. 3.3.2.Bosnia and Herzegovina The economy registered moderate growth of 1.8% in the first 3 quarters of 2016. The year before, output growth was 3.4%. The main sources of growth have been manufacturing and industry, while the contribution of public consumption to growth remained limited. The labour market situation remained difficult. Output growth led to an increase in registered employment by 2.1% in 2016, compared to an increase of 1.5% the year before. The average rate of unemployment based on registered unemployment figures dropped to 41.8% in 2016 from 43.6% the year before, while the LFS unemployment rate declined to 25.4% in mid-2016 from 27.7% a year earlier. Still, the level of unemployment remains one of the highest in the region. The price level continued to decline: in 2016, overall consumer prices were 1% lower than a year before. Lower prices for energy played an important part in price developments. Financial sector indicators point to a moderate expansion. During 2016, credit growth remained low at 2.1%. Liquidity in the financial system is sufficient; however, demand for loans from private companies is weak. Deposit growth has maintained its markedly stronger performance, increasing by 7.7% in 2016, compared to 6.2% the year before. As a result, the loan to deposit ratio continued to improve, dropping below 100% in November. The share of non-performing loans in total loans continued to improve slightly, declining to 12.1% in the third quarter from 12.8% a year earlier. The current account improved slightly in the first three quarters of the year, mainly reflecting lower prices for energy imports, low investment and stronger exports. As a share of GDP, the current account deficit for the first 9 months of 2016 dropped to 4.5% of GDP from 5.9% of GDP the year before. The share of commodity exports rose to 25% of GDP, compared to 24.0% the year before. Spending for imports declined slightly, reaching 49.2% of GDP, compared to 49.7% the year before, reflecting lower prices for energy imports but also low growth of private and public investment. The share of primary income and workers remittances remained largely unchanged, while FDI inflows dropped further, reaching 1.3% of GDP in the first nine months, compared to 2.3% the year before. The drop in FDI inflows is probably related to slow progress with structural reforms and a recent increase in inter-entity political tensions. The performance of fiscal revenues during the first three quarters appears to have remained in line with the overall economic development, increasing by 1.8%. However, due to delays in accessing planned external finances, public spending had to be contained. This led to a markedly lower increase in current spending, of some 0.8% year-on-year, according to preliminary Central Bank data. In particular, spending on public employment was lower than a year before. Public debt stood at 41.2% of GDP in the third quarter, unchanged from the second quarter and slightly lower compared to end-2015 (41.9%). Compared to the end-year level, foreign denominated debt rose by 1.3%, which however was largely compensated by a 3.1% decrease in debt denominated in the local currency. The three largest holders of foreign debt are the World Bank, the European Investment Bank (EIB) and the International Monetary Funds (IMF), accounting for 22%, 19% and 12% respectively of the country's total foreign public debt. On 7 September, the IMF approved a 3-year, 550 million EUR Extended Funds Facility, which should alleviate external financing constraints while proceeding with structural reforms. 3.4.ENP countries 3.4.1.Armenia Armenia’s real GDP growth remained positive in 2016, albeit slowing down from 3% in 2015 to around 0.2% in 2016, notably on the back of weakness primarily in domestic demand. The economy registered relatively high growth in the first half of the year, although subsequently slowing down sharply in the second part of 2016, prompted mainly by a decline in construction and agriculture. Domestic demand remains constrained by reduced remittances (-13.4% y-o-y in first half of 2016, following a contraction of 29% in 2015), while the unemployment rate continues to be high at 18.1% (Q3 2016), although at a lower level than the one witnessed for 2015 (18.5%). Year-end inflation turned negative at the end of 2015, well below the Central Bank’s target range of 4%±1.5 percentage points. The deflationary trend persisted in 2016, with consumer prices down 1.1% y-o-y at year end, mainly on the account of falling food prices. Accounting for this and for the economic slowdown, the Central Bank of Armenia continued easing monetary conditions in 2016, cutting the interest rate to 6.25% in December. Rates were further cut to 6% in February 2017. Partly due to low tax revenues, public finances in Armenia are structurally vulnerable, with both the budget deficit and public debt rising in 2016, to an estimated 5.5% and 56% of GDP, respectively. The breach of 50% of GDP of public debt in 2016 has triggered Armenia’s fiscal rule, which prescribes a significant fiscal consolidation in 2017 in response (the fiscal deficit for the following year shall be lower than 3% of the average GDP for the last three years). Thus, the approved budget for 2017 foresees a deficit of 2.8% of GDP. However, this will be difficult to achieve and would impose a significant fiscal retrenchment at a time of slow growth, as well as endanger the continuation of some key public investments. On the other hand, the external sector has improved and is gradually adjusting. Armenia's current account deficit is expected to narrow further in 2016, from the 2015 figure of 2.7%, and still well below the 7.6% level of 2014. The depreciation of the dram contributed to the resilience of exports, while the steep decline in imports was partly due to the fall in remittances, overall domestic demand weakness as well as low FDI. Gross international reserves have increased, partially due to improvements in the current account. Reserves in 2016 are now estimated to cover 5 months of imports. Total external debt is expected to have amounted to over 88% of GDP at the end of 2016, up from close to 71% in 2014. While Armenia's high external debt represents a source of vulnerability, the level is expected to decrease in the medium-term, provided that the authorities implement a credible, balanced medium-term fiscal consolidation strategy. On 7 December 2016, the IMF completed the fourth review under the extended arrangement, recognising generally good performance, except for the fiscal target that was missed. The completion enabled the release of SDR 15.65 million (about US$21.24 million), bringing total disbursements under the arrangement to SDR 66.52 million (about US$90.28 million). 3.4.2.Ukraine Ukraine’s economy stabilised in 2016. This was achieved by a strong policy response to address long-term imbalances and ongoing international financial and technical support that helped to rein in the confidence crisis that unfolded with the conflict in eastern Ukraine in 2014 and in early 2015. As a result, the economy expanded in real terms for the first time in four years. GDP growth amounted to an estimated 2.2% in 2016 (compared with a 9.8% contraction in 2015), supported by rising household demand following considerable growth in real incomes but also a strong rebound in investment activity. On the supply side, the economy benefited from a bumper harvest, increased retail activity as a result of improving consumer confidence and a strong pick-up in construction. Industrial production also rose in 2016, although moderately by 2.4%, after contracting in each of the previous four years. The pick-up in economic activity did not feed into the labour market as the unemployment rate remained largely stable over the year.

Absent significant demand-side pressures and due to reduced volatility on the foreign exchange market, consumer price inflation moderated significantly throughout 2016 - to 12.4% at the end of the year from 43.4% at end-2015. Prudent monetary and fiscal policies, coupled with weak commodity prices, were also conducive to the disinflation. Similar to 2015, price growth in 2016 was largely the result of increases of administratively-regulated prices, in particular gas tariffs, and core inflation stood at a relatively moderate 5.8% at the end of the year. The more stable inflationary environment and exchange market situation allowed the central bank to gradually ease many of its currency and capital controls and further reduce the key policy rate – by a cumulative 8 percentage points over the course of the year to 14%. Fiscal prudence was largely retained in 2016. The ongoing strong tax collection enabled the authorities to finish the year with a consolidated government deficit of 2.3% of GDP compared with a 3.7% deficit target agreed under the IMF programme. In annual terms, however, the deficit widened from the 1.6%-of-GDP gap recorded in 2015. The increase reflects the halving of the social payroll tax as of 2016 and the absence of one-off revenues that positively affected the 2015 budget performance. Prudent fiscal policies, and in particular the elimination of the operational deficit of the oil and gas company Naftogaz, were important in containing the increase of the debt-to-GDP ratio despite the costs (4.5% of GDP) associated with the nationalisation of PrivatBank, the biggest commercial lender, in December. General government debt, including state guarantees, inched up to 81.6% of GDP at the end of 2016 from 79.4% a year earlier. The pick-up in investment activity in 2016 contributed to a widening of the current account deficit to 3.6% of GDP from 0.2% a year earlier. Another factor for the increase was weak export performance due to low commodity prices and additional impediments to trade imposed by Russia in the form of a ban on transit exports to Central Asia. The current account gap was entirely covered by capital inflows despite pressures arising from the resumption of dividend payments abroad as part of the moves of the central bank to gradually ease capital controls and improve the business environment. While international financial assistance came below expectations in 2016, it supported the ongoing build-up of international reserves, which reached USD 15.5 billion at the end of 2016, or 3.5 months of next year's imports. In the financial sector, the authorities continued implementing ambitious measures to strengthen confidence in the system, including by improving supervision, ensuring the recapitalisation of commercial banks and unwinding related-party lending. In an important move to safeguard the stability of the banking system, the authorities nationalised PrivatBank, the biggest commercial lender, in December 2016. This move was needed because of the large capital shortfalls identified in the bank related to the poor quality of the credit portfolio (97% of it is estimated to be related to companies associated with the former owners of the bank), the inability of the former owners to cover the capital gap, and the systemic nature of the bank (PrivatBank accounts for 36% of all household savings). As a result of the provisioning of PrivatBank's loan portfolio, the loss of the Ukrainian banking sector increased to UAH 159 billion in 2016 from UAH 66 billion a year earlier. Still, 2016 was marked by continuing deposit growth, mainly as a result of rising corporate deposits due to growing corporate profitability. At the same time, despite high liquidity in the banking system, credit activity remained weak. This was due to the high debt overhang and the fact that legal impediments for the resolution of non-performing loans (NPLs) remain despite some measures to address the problem, such as the entry into force in October 2016 of a new out-of-court resolution framework. 3.5.Mediterranean partners 3.5.1.Egypt Following a protracted period of political instability since the revolution in January 2011, which had a strongly negative effect on the economy, Egypt seemed to have turned a corner following the election of President al-Sisi in May 2014 and renewed efforts to push forward with fiscal consolidation and key economic reforms (notably of the price subsidy system) and to support investment, including by attracting foreign investors. However, the macroeconomic situation and the reform momentum again weakened during fiscal year (FY) 2015/16 (ending in June 2016). Indeed, the negative effects on tourism (accounting for over 11% of GDP in 2015, and a large generator of foreign currency) following the Russian plane crash of 31 October 2015 exacerbated an already vulnerable situation in the sector. This contributed to a slowdown in GDP growth to 3.8% in FY 2015/16. And, in a context of slower growth and large public investments, fiscal deficit worsened again from already very high levels (it rose to 12% of GDP in FY15/16, up from 11.7% GDP the preceding year), increasing the pressure to secure sources of financing. Public debt continued to increase in FY 2015/2016, reaching about 90% of GDP, up markedly from almost 73% in FY2010/11. Regarding Egypt's external position, the current account deficit has worsened from -0.8% of GDP in FY13/14 to -5.5% in FY15/16. This deterioration of the current account was also accompanied by substantial capital outflows and pressures on the exchange rate. Foreign reserve levels, for their part, are very vulnerable (at 3.6 months of imports, up from 3.1 at the end of FY14/15). By contrast, external debt remains low, though it has been increasing rapidly in recent years (from 13% of GDP in FY 2011/12 to a projected 23% of GDP in FY 2016/17). In this increasingly difficult context, and as a response to the country's persistent high funding needs, in November 2016 Egypt and the IMF signed a staff-level agreement for a 3-year Extended Fund Facility programme, for a total amount of USD 12 billion, aimed at supporting the country's economic growth programme. The first measure under the IMF programme was implemented on 3 November 2016, when the Central Bank of Egypt adopted a flexible exchange rate regime, thus ending a longstanding overvaluation of the Egyptian pound in order to improve export competitiveness and replenish foreign exchange reserves. Since then the exchange rate against the USD has more than halved, with a positive impact on exports and remittances, but at the same time causing prices of imported commodities, and consumer prices in general, to rocket (the year-on-year inflation rate recorded in December 2016 exceeded 20%). The programme also targets a substantial fiscal consolidation (a 5 percentage point reduction in the primary deficit) over the IMF programme period. Fiscal consolidation measures include the recent introduction of a VAT an additional steps to cut energy subsidies. Unemployment remains high (at an estimated rate of 12.7% at end 2016), compared to pre-2011 figures (i.e. 9%). Total government debt continued to increase in FY15/16, reaching about 90% of GDP, up from almost 73% of GDP in FY10/11. The mid-term objective announced by the government is to reduce the figure to between 80-85% of GDP within five years. Aside from the IMF loan, Egypt has secured funding from GCC countries, the World Bank and the African Development Bank, and G7 donors. Additionally, the Government plans to issue Eurobonds for an initial amount of USD 2 billion in Q1 2017, in order to diversify its financing sources. Egypt's sovereign credit ratings have slightly improved since 2013, and remained stable since: S&P from CCC+ to B-; Fitch from B- to B, and; Moody's from Caa1 to B3. Overall, macroeconomic risks remain high in Egypt, although they are being addressed in the context of the adjustment and reform programme agreed with the IMF. 3.5.2.Morocco The Moroccan economy grew more slowly in 2016 due to a strong contraction in agricultural output and timid non-agricultural activity. Economic growth is estimated to have reached 1.5% in 2016, dropping substantially from the 4.5% growth in 2015. Real GDP growth for 2017 is forecast to rebound to around 4.4%, primarily on the back of a recovery in agriculture, but subject in particular to external risks. Meanwhile, internal structural challenges of the economy persist, e.g. in the labour market. The unemployment rate is estimated to have remained below 10% in 2016, with youth unemployment remaining high, estimated at almost 25%, according to the Moroccan statistics office. Annual average inflation is estimated to have increased only slightly in 2016, reaching 1.6%. In monetary policy making, the authorities continued to balance controlling inflation and managing the exchange rate, although they reaffirmed their intention to move towards a more flexible exchange rate regime. The policy rate was lowered by 25 basis points to 2.25% in March 2016 and remained unchanged throughout the remainder of the year. Morocco's current account deficit is estimated to have widened to 2.9% of GDP (3.8% excluding official transfers) from 2.2% of GDP (2.6% excluding official transfers) in 2015, reflecting low phosphate prices and increased equipment and food imports, despite some improvement in transfers and services. Nevertheless, the development of the trade balance in 2016 is consistent with relatively sound underlying demand and investment growth in Morocco, combined with a need to compensate for the disappointing harvest with increased food imports. According to preliminary data, net FDI inflows dropped by around 28%, but remittances increased by 3.4% (reaching more than 2.5 times the value of net FDI inflows in absolute terms). International reserves increased to EUR 24 billion in 2016, thus covering almost 7 months’ worth of next year’s imports. The fiscal deficit is estimated to have narrowed from -4.4% in 2015 to -3.5% in 2016, reflecting good tax revenue performance in particular, but also lower expenditure on subsidies due to effective reforms. Given relatively weak nominal GDP growth, public debt is likely to have continued to follow a moderate upward trend, from the 64% of GDP recorded in 2015. While this is relatively high for an emerging economy and compared to the region average, there are no immediate sustainability concerns. A mitigating factor is the fact that about 75% of public debt is denominated in domestic currency. The financial sector is well supervised and has strong fundamentals. However, non-performing loans are continuing on their upward trend, particularly due to the non-financial corporate sector, and concentration risks also must continue to be monitored. Credit growth has started to recover, notably due to increased household and investment lending. In July 2016, the IMF approved a new 24-month Precautionary and Liquidity Line (PLL) arrangement of about EUR 3.3 billion. Morocco’s two previous PLL arrangements were completed successfully and not drawn upon.

3.5.3.Syria Syria's economic and financial situation and outlook are difficult to assess, given the lack of reliable data due to the ongoing conflict. It is clear, however, that the conflict continues to have a strong negative impact on the macroeconomic situation of the country, including its balance of payments position. Since the conflict started in 2011, growth has been significantly affected by a sharp slowdown in virtually all economic activity (including trade, tourism and agriculture) as a result of the extensive destruction of infrastructure and emigration, aggravated by the US and EU embargo. The Syrian GDP is estimated to have contracted by almost 60% between 2010 and 2015, based on IMF estimates. According to the Syrian Central Bureau of Statistics, average consumer prices have increased more than sixfold between July 2010 and July 2016. Price increases affected all categories due to the lack of supply and the collapse of the Syrian pound (SYP) which has declined dramatically from SYP 56 against the EUR in 2011 to over SYP 550 in February 2017. The conflict has also weighed heavily on the fiscal situation by markedly impacting productive capacity, the state's revenue-generating capacity, and by pushing up defence expenditure. External debt estimates range from 23% to 60% of GDP, compared to 9% of GDP in 2009. Furthermore, debt service paid has stopped almost completely since 2012. The trade balance deficit has increased by an estimated 45% between 2010 and 2015, with a drop in exports estimated at almost 70% during the same period. Considering the sharp drop in export revenue and financial inflows, foreign exchange reserves are believed to have dropped considerably. Official reserves are tentatively estimated to have decreased to USD 1 billion in 2015 (a substantial drop from the USD 19.8 billion at end-August 2012, the latest IMF data available). The maintenance of a minimum level of reserves has largely been possible due to the financial support from the allies of the Syrian regime, notably Iran. 3.5.4.Tunisia In parallel to a protracted and fragile political transition process since the 2011 revolution, the Tunisian economy has suffered from continuous domestic unrest, regional instability, and a weak international environment (particularly in the euro area). These unfavourable developments substantially weakened its growth performance, as well as its fiscal and balance of payments positions. The risks associated with this situation are however partly mitigated by the adjustment and reform programme the Tunisian authorities have put in place with substantial support from the IMF, the EU and other donors. In May 2016, Tunisia and the IMF entered a USD 2.9 billion Extended Fund Facility (EFF) expiring in May 2020, aimed at supporting the country's five-year economic programme (2016-2020). The EFF follows and IMF 24-month Stand-By Arrangement (SBA) of USD 1.75 billion approved by the IMF Board on June 2013. The completion of the first review of the EFF, initially foreseen for end September 2016, has been delayed, however, reflecting problems with compliance of some benchmarks and disagreements over fiscal policy. Moreover, Tunisia is a recipient of complementary EU Macro-Financial Assistance (MFA) for a total amount of EUR 300 million in loans, approved in May 2014 and whose first two tranches, totalling EUR 200 million, were disbursed in 2015. The disbursement of the third tranche of EUR 100 million, initially planned for 2016, had to be postponed due to the incomplete implementation of the measures attached to it and to the IMF programme being on hold. Moreover, following Tunisia's request for additional MFA support of 2015, the EU approved a second MFA operation of EUR 500 million in loans in July 2016. The GDP growth rate for 2016 is estimated to have reached 1.1%, which, although it represents a slight acceleration from the 0.8% recorded in 2015, remains well below the growth rates achieved in the decade preceding the revolution. The unemployment rate stands at 15.5%, particularly among the young and graduates (over 30%). Inflation has averaged around 3.7% in 2016, down from 5% in 2015, and is expected to reach an average of 3.9% in 2017, according to IMF projections. Regarding public finances, in 2016 the government deficit is estimated to have reached 6.5% of GDP (up from 5.5% of GDP in 2015 and against the 4.6% agreed under the IMF programme), due to a variety of factors including lower than expected tax collections, higher debt service costs (also driven by the depreciation of the Tunisian dinar) and an increased public wage bill. The debt of the general government has continued to increase and is estimated to have reached over 60% of GDP in 2016, up from 55% of GDP in 2015. Also, a substantial increase in public debt amortisations is scheduled to take place in the coming years (from about USD 600 million in 2015 to more than USD 1.4 billion in 2017, and almost USD 1.2 billion in 2018). External debt increased from 48% of GDP in 2011 to 56.2% of GDP in 2014, and it is estimated to have reached 70% in 2016. The latest Public Debt Sustainability Assessment by the IMF (June 2016) considered the debt dynamics sustainable, although it also highlighted their vulnerability to an overvalued exchange rate and to real GDP growth shocks. Tunisia’s sovereign ratings have been downgraded several times since 2011, most recently by Fitch from BB- to B+ (on 3 February 2017). In addition, in November 2016 Moody's changed the outlook from "stable" to "negative". Despite the decline in oil prices, weaker domestic economic activity and improved export performance, the negative effects on tourism of the terrorist attacks have contributed to keeping the current account deficit at an unsustainable high level of 8.7% of GDP in 2016. Reserves are estimated to have ended 2016 at USD 6.7 billion, or around 4.3 months of imports. 3.6.Other countries 3.6.1.Brazil Over the past two years, Brazil experienced the worst recession in several decades. While worsening external conditions dampened growth, the recession has been largely due to domestic factors. In particular, the largest corruption scandal in Brazil's history as well as the political turmoil surrounding the impeachment of ex-president Dilma Rousseff severely dented confidence and affected investment. GDP contracted by 3.8% in 2015. The recession continued throughout 2016 with GDP expected to have fallen by another 3.4%. Recent economic indicators suggest that the economy is approaching a recovery phase. An environment of lower inflation, improved confidence and easier monetary policy will be supportive of growth but continued fiscal tightening together with subdued investment growth are expected to limit the pace of economic expansion. According to the European Commission Winter forecast, growth is projected to reach 0.6% and 1.7% in 2017 and 2018, respectively.