Report from the Commission to the budgetary authority on guarantees covered by the general budget Situation at 31 December 2006 {SEC(2007)1050}
Date: 2007-07-30
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.7.2007 
COM(2007) 454 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 31 December 2006 

{SEC(2007)1050} 

EN 

   EN 

 
 
 
  
 
 
 
TABLE OF CONTENTS 

Introduction and types of covered operations .............................................................. 4 

New legal bases............................................................................................................ 4 

Events since the last report at 30 June 2006 ................................................................ 5 

Data on risks covered by the Budget ........................................................................... 5 

Definition of risk .......................................................................................................... 5 

Risk linked to Member States ...................................................................................... 7 

Risk linked to third countries ....................................................................................... 8 

Global risk covered by the budget ............................................................................... 8 

Evolution of risk........................................................................................................... 9 

Defaults, activation of Budget guarantees and arrears............................................... 10 

Payments from cash resources ................................................................................... 10 

Payments from the Budget ......................................................................................... 10 

Activation of the Guarantee Fund .............................................................................. 10 

Guarantee Fund for external actions .......................................................................... 10 

Recoveries .................................................................................................................. 10 

Assets at year-end ...................................................................................................... 10 

Target amount ............................................................................................................ 11 

Evaluation of risks: Economic and financial situation of the third countries benefiting 
from the most important EU loan operations............................................................. 11 

Introduction ................................................................................................................ 11 

Egypt .......................................................................................................................... 11 

Turkey ........................................................................................................................ 11 

Brazil .......................................................................................................................... 12 

Morocco ..................................................................................................................... 12 

Tunisia........................................................................................................................ 12 

South Africa ............................................................................................................... 12 

Lebanon...................................................................................................................... 13 

Jordan ......................................................................................................................... 13 

1. 

2. 

3. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

4.5. 

5. 

5.1. 

5.2. 

5.3. 

6. 

6.1. 

6.2. 

6.3. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

7.7. 

7.8. 

7.9. 

7.10. 

Serbia and Montenegro .............................................................................................. 13 

EN 

2 

   EN 

 
7.11.  Ukraine....................................................................................................................... 14 

EN 

3 

   EN 

 
1. 

INTRODUCTION

1

 AND TYPES OF COVERED OPERATIONS 

The risks covered by the budget of the European Union ("the Budget") derive from a variety 
of lending and guarantee operations which can be divided into two categories: loans granted 
by the European Communities with macroeconomic objectives, i.e. macro-financial assistance 
("MFA")  loans  to  third  countries,  and  loans  with  microeconomic  objectives  (Euratom  loans 
and  European  Investment  Bank  ("EIB")  external  lending2).  These  operations  have  been 
covered since 1994 by the Guarantee Fund for external actions ("the Fund")3 which was set 
up,  among  other  things,  to  limit  the  budgetary  impact  stemming  from  calls  on  guarantees 
given  by  the  Budget  for  lending  operations  in  third  countries.  If  there  are  insufficient 
resources in the Fund, recourse will be made to the Budget. 

The Council Regulation establishing the Fund (the "Fund Regulation"4), which was adopted 
in  1994,  was  first  amended  in  1999.  Following  a  second  amendment  of  the  Council 
Regulation which was adopted in 2004 by the Council, the Fund's coverage is withdrawn if 
third countries become Member States. The Budget directly covers loans or guaranteed loans 
to Member States. 

2. 

NEW LEGAL BASES 

Under  the  new  Financial  Framework,  the  Interinstitutional  Agreement  of  17 May 2006 
between the European  Parliament, the  Council and the Commission on budgetary discipline 
and sound financial management5 has entered into force on 1 January 2007. According to this 
agreement, the provisioning of the Fund is carried out through a Budget line under Heading 4 
(EU as a global player) and not, as before, through a dedicated Reserve. 

In line with the Interinstitutional Agreement, the Fund Regulation had to be amended in order 
to  reflect  the  cancellation  of  the  Reserve.  Consequently,  a  new  Council  Regulation  was 
adopted  on  30 January 20076,  which  in  addition  has  provided  the  Fund  with  a  new,  more 
efficient provisioning mechanism in terms of the use made of budgetary means. Moreover, the 
transparency  and  programming  of  budgetary  transactions  have  been  enhanced.7  The  content 
of this report has been adapted in consequence thereof. 

The Council decided on 19 December 20068 to grant a renewed Community guarantee to the 
EIB against losses under loans and loan guarantees for projects outside the Community. This 
Community  guarantee  is  restricted  to  65%  of  the  aggregate  amount  of  credit  disbursed  and 

1 

2 
3 

4 

5 
6 
7 
8 

COM(2007)66  and  SEC(2007)241  make  up  the  previous  report  on  the  guarantees  covered  by  the 
Budget at 30 June 2006. 
The details concerning the EIB mandates are displayed in Table A1 of the Annex. 
For the most recent report on the Fund, see COM(2006)695 "Comprehensive Report on the functioning 
of the Guarantee Fund" and the annexed staff working document (SEC(2006)1460). 
Council Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions, OJ 
L  293,  12.11.1994, p.1,  as  amended  by  Council  Regulation (EC, Euratom)  No 1149/1999, OJ  L 139, 
2.6.1999,  p.  1,  Council  Regulation  (EC,  Euratom)  No  2273/2004,  OJ  L  396,  31.12.2004,  p.  28,  and 
Council Regulation (EC, Euratom) No 89/2007, OJ L 22, 31.1.2007, p. 1.  
OJ C 139, 14.6.06, p.1. 
Council Regulation (EC, Euratom) No 89/2007, OJ L 22, 31.1.2007, p. 1. 
For information on the old provisioning mechanism, see the report mentioned supra, footnote 1. 
Council Decision 2006/1016/EC of 19 December 2006, OJ L 414, 30.12.2006, p. 95. 

EN 

4 

   EN 

 
                                                 
guarantees  provided  under  EIB  Financing  Operations,  less  amounts  reimbursed  and  plus  all 
related  sums,  with  a  maximum  ceiling  of  EUR 27,800 million  throughout  the  2007 – 2013 
period.  This  decision  also  stipulates  that  the  Commission  and  the  EIB  shall  enter  into  a 
guarantee  agreement  laying  down  the  detailed  provisions  and  procedures  relating  to  the 
Community  guarantee  as  well  as  a  recovery  agreement  laying  down  the  provisions  and 
procedures  in  relation  to  the  EIB's  obligation  to  seek  to  recover  amounts  paid  by  the 
Community pursuant to a call on the Community guarantees.  

There were no new decisions on MFA loans or Euratom loans in 2006. 

3. 

EVENTS SINCE THE LAST REPORT AT 30 JUNE 2006 

There were no disbursements under MFA loans during the second half of 2006.9 

Regarding  Euratom  loans,  there  were  no  disbursements  in  the  second  half  of  2006. 
Disbursement  of  a  first  tranche  of  EUR 39 million  has  taken  place  in  March 2007  for  the 
financing of a safety upgrade of Unit 2 of the Khmelnitsky and Unit 4 of the Rovno nuclear 
power plants (K2R4) under the loan agreement of 2004 (EUR equivalent of USD 83,000,000 
Loan Facility Agreement). 

4. 

DATA ON RISKS COVERED BY THE BUDGET 

4.1. 

Definition of risk 

The risks borne by the Budget derive from the outstanding amount of capital and interest in 
respect of guaranteed operations. 

Defaulting  operations  will  be  covered  by  the  Fund  when  they  are  linked  to  third  countries 
(67% of the total outstanding amount guaranteed) and directly by the Budget where Member 
States are involved (loans to or for the benefit of projects in Member States account for the 
remaining  33%  of  the  total  outstanding  amount).  The  large  proportion  of  guaranteed  loans 
linked  to  Member  States  is  the  result  of  the  recent  enlargement  rounds.  According  to 
Article 1, third paragraph of the Fund Regulation, once a country becomes a Member State, 
the risk on the loans is transferred from the Fund to the Budget. 

For  the  purpose  of  this  report,  two  methods  are  used  for  evaluating  the  risks  borne  by  the 
Budget: 

9 

MFA may also take the form of grants to third countries. For more information on MFA, see the annual 
report  from  the  Commission  to  the  Council  and  the  European  Parliament  on  the  implementation  of 
macro-financial assistance to third countries in 2006. 
First  and  second  payments  of  grant  (EUR 11 million  each)  were  paid  to  Georgia  in  August  and 
December 2006 under the 2006 Council Decision. 
Under MFA programmes of 1997 and 2000, the last grant disbursement to Tajikistan (EUR 7 million) 
was made in October 2006. 
Albania also received a grant of EUR 13 million corresponding to the last instalment of a 2004 Council 
Decision. 

EN 

5 

   EN 

 
                                                 
 
 
 
–  The  method  of  calculating  the  total  amount  of  capital  outstanding  for  the  operations 
concerned  on  a  given  date.  This  methodology  gives  the  level  of  risk  supported  by  the 
Budget on a given date. 

–  The budgetary approach defined as "the annual risk borne by the Budget" is based on the 
calculation  of  the  maximum  amount  which  the  Community  would  have  to  pay  out  in  a 
financial year assuming that all guaranteed loans are in default10. 

Table 1: Total outstanding amounts covered as of 31.12.2006 in EUR million 

Outstanding 
Capital 

Accrued Interest 

Total 

% 

Member States* 

MFA 

Euratom 

EIB 

Sub-total Member States* 

Third Countries 

MFA 

Euratom 

EIB 

365 

436 

4,482 

5,283 

604 

- 

10,311 

Sub-total third countries 

10,915 

Total 

16,198 

2 

6 

42 

50 

6 

- 

103 

110 

159 

367 

442 

4,524 

5,333 

610 

- 

10,415 

11,025 

2%

3%

28%

33%

4%

64%

67%

16,358 

100%

* Including Bulgaria and Romania as they have joined the EU on 01.01.2007. 

Tables  A1,  A2,  A3  and  A4  of  the  Staff  working  document11  annexed  to  this  report  (the 
"Annex")  provide  other  information  on  these  outstanding  amounts,  in  particular  in  terms  of 
ceiling, disbursed amounts or guarantee rates. 

10 

11 

For the purpose of this calculation, it is assumed that defaulting loans are not accelerated, i.e. only due 
payments are taken into account (see also section 1 of the Annex). 
SEC(2007). 

EN 

6 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                 
4.2. 

Risk linked to Member States 

Current risks on Member States result from loans disbursed prior to accession. 

In 2007, the Budget will bear a risk linked to Member States of EUR 812 million including 
Bulgaria and Romania as they have joined the Union on 1 January 2007. Table 2 shows that 
these two states are ranked first and second in terms of their outstanding amount. 

Table  2:  Ranking  of  the  Member  States  according  to  the  exposure  with  regard  to  the 
maximum risk borne by the budget in 2007 (EUR million) 

Ranking 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Country 

Romania* 

Bulgaria* 

Czech Republic 

Poland 

Slovakia 

Slovenia 

Hungary 

Cyprus 

Lithuania 

Latvia 

Estonia 

Malta 

Total 

* Member States as of 01.01.2007 

2007 

263.4 

155.7 

102.2 

98.4 

72.8 

39.2 

35.6 

15.7 

14.8 

8.5 

4.7 

1.0 

% 

32.4% 

19.2% 

12.6% 

12.1% 

9.0% 

4.8% 

4.4% 

1.9% 

1.8% 

1.0% 

0.6% 

0.1% 

812.1 

100% 

EN 

7 

   EN 

 
 
 
 
4.3. 

Risk linked to third countries 

In 2007, the Fund will bear a maximum risk related to third countries of EUR 1,203 million. 
The top ten countries according to their total outstanding are listed below. They account for 
78%  of  the  risk  borne  by  the  Fund  in  2007.  The  economic  situation  of  these  countries  is 
analyzed and commented in Section 7 below. 

Table 3: Ranking of the 10 most important third countries according to the exposure 
with regard to the maximum risk borne by the budget in 2007 (EUR million) 

Ranking 

Country 

1 

2 

3 

4 

5 

6 

7 

8 

9 

Egypt 

Turkey 

Brazil 

Morocco 

Tunisia 

South Africa 

Lebanon 

Jordan 

Serbia and 
Montenegro12 

10 

Ukraine 

Total of the 10 

2007 

152.9 

151.0 

130.3 

117.4 

112.2 

93.6 

56.4 

44.8 

43.5 

36.8 

939.0 

% of the total 
maximum risk 

12.7% 

12.6% 

10.8% 

9.8% 

9.3% 

7.8% 

4.7% 

3.7% 

3.6% 

3.1% 

78.0% 

The Fund covers the guaranteed loans of 38 countries and 2 regional entities with maturities 
ending 2035. Details by country are provided in Table A2 of the Annex. 

4.4. 

Global risk covered by the budget 

In total, the Budget will cover in 2007 a global amount of EUR 2,015 million representing the 
amounts due during the year, where 40% are represented by Member States (see Table A2 in 
the Annex). 

12 

Now the Republic of Serbia and the Republic of Montenegro. 

EN 

8 

   EN 

 
 
 
 
 
 
 
                                                 
4.5. 

Evolution of risk 

The risk towards Member States should decrease in future as the loans are reimbursed and no 
new  loans  will  be  signed  with  Member  States  under  Euratom,  MFA  or  EIB  guaranteed 
lending (see Graph A1 in Section 1.3 of the Annex). 

MFA loans to third countries are subject to individual decisions by the Council. At present, 
there are no new proposals from the Commission concerning the grant of loans. However, a 
proposal  for  granting  an  MFA  loan  of  EUR 50 million  and  a  grant  of  EUR 30 million  to 
Lebanon may be launched in 2007 by the Commission. 

The Euratom lending to Member States or in certain eligible non-member countries (Russian 
Federation,  Republic  of  Armenia,  Ukraine)  has  a  ceiling  of  EUR 4 billion  of  which  around 
85% have already been used. The remaining margin is about EUR 600 million. 

Under  the  2000-2007  EIB  mandates,  an  amount  of  EUR 9,830 million  remains  to  be 
disbursed. Moreover, at the end of 2006 the EIB has not signed any loan agreements under the 
Council decision concerning a special lending action for certain types of projects in Russia, 
Belarus,  Moldova  and  Ukraine13.  This  decision  has  a  ceiling  of  EUR 500 million  with  a 
guarantee rate of 100% and expires on 31 July 2007. 

The  most  important  item  that  will  impact  the  risk  for  the  budget  in  future  is  the  recent 
Community guarantee granted to the EIB14 during the period beginning on 1 February 2007 
and  ending  on  31 December 2013  (with  the  possibility  of  an  extension  by  six  months).  The 
Community  guarantee  is  restricted  to  65%  of  the  aggregate  amount  of  credit  disbursed  and 
guarantees  provided  under  EIB  Financing  Operations,  less  amounts  reimbursed  and  plus  all 
related  sums,  with  a  maximum  ceiling  of  EUR 27,800 million.  This  maximum  ceiling  is 
broken down into two parts: a basic ceiling of EUR 25,800 million and an optional mandate 
of EUR 2,000 million. The use of the optional amount will depend on the result of the mid-
term  review  due  in  2010.  The  basic  ceiling  is  split  into  the  following  binding  regional 
ceilings: 

– 

– 

– 

– 

Pre-Accession countries: EUR 8,700 million; 

Neighbourhood and Partnership countries: EUR 12,400 million; 

Asia and Latin America: EUR 3,800 million; 

Republic of South Africa: EUR 900 million. 

In Section 1.3 of the Annex, Graph A2 simulates some scenarios of disbursements under the 
current mandates as well as the new mandate and their effect on the Fund provisioning. 

13 
14 

Council Decision 2005/48/EC of 22 December 2004, OJ L 21, 25.1.2005, p. 11. 
See also Section 2 of this report. 

EN 

9 

   EN 

 
                                                 
5. 

DEFAULTS, ACTIVATION OF BUDGET GUARANTEES AND ARREARS 

5.1. 

Payments from cash resources 

The Commission draws on its cash resources in order to avoid delays and resulting costs in 
servicing its borrowing operations when a debtor is late in paying the Commission15. 

5.2. 

Payments from the Budget 

No  appropriation  was  requested  under  Budget  Article  01 04 01,  "European  Community 
guarantees for lending operations", as no default was recorded in the second half of 2006. 

5.3. 

Activation of the Guarantee Fund 

In  the  event  of  late  payment  by  the  beneficiary  of  a  loan  (third  countries)  granted  or 
guaranteed by the Community, the Fund is called on to cover the default within three months 
of the date on which payment is due.16 

During the second half of 2006, the Fund was not called. 

The total arrears at 31 December 2006, i.e. penalty interests with the Republic of Argentina, 
amount to USD 1,718,493.12. USD 1,448,433.44 thereof (EUR equivalent 1,099,797.60) are 
still to be recovered by the Fund. As the Fund was not called for the remaining difference, this 
amount is due to the EIB. The Commission and the EIB have on several occasions reminded 
the Argentinean authorities the need to fully clear these arrears before the resumption of new 
EIB  lending  operations  in  the  country.  Discussions  on  this  issue  will  continue  in  the 
framework of the next meeting of the EU-Argentina macroeconomic dialogue. 

6. 

GUARANTEE FUND FOR EXTERNAL ACTIONS

17 

6.1. 

Recoveries 

No recovery occurred in the second half of 2006. 

6.2. 

Assets at year-end 

At 31 December 2006, the net assets of the Fund amounted to EUR 1,378,954,442.51. 

At  31 December 2006,  outstanding  lending  and  loan  guarantee  operations  plus  accrued 
interest  for  Bulgaria  and  Romania  amounted  to  EUR 2,899,334,719.06.  As  these  countries 
became  members  of 
the  European  Union  on  1 January 2007,  an  amount  of 
EUR 260,940,124.72 was repaid to the Budget on 14 February 2007. 

15 

16 
17 

Cf.  Article  12  of  Council  Regulation  (EC, Euratom)  No.  1150/2000  of  22  May  2000,  as  amended, 
implementing Decision 94/728/EC, Euratom, on the system of the Communities' own resources. 
For more details, see Section 1.4.3. of the Annex. 
Annual  Report  from  the  Commission  on  the  Guarantee  Fund  and  its  Management  in  2006: 
COM(2007)362 and SEC(2007)869. 

EN 

10 

   EN 

 
                                                 
6.3. 

Target amount 

The Fund has to reach an appropriate level (target amount) set at 9% of the total outstanding 
capital  liabilities  arising  from  each  operation,  plus  accrued  interest.  The  ratio  between  the 
liabilities 
Fund's 
(EUR 11,025,065,532.58) within the meaning of the Fund Regulation was 10.1%. Since this 
is higher than the target amount, a repayment from the Fund to the Budget has to be made, as 
provided for in the third paragraph of Article 3 of the Fund Regulation. 

(EUR 1,118,014,317.79) 

outstanding 

resources 

capital 

and 

According to the new provisioning rules, this surplus of EUR 125,750,000.00 will be inserted 
in 2007 in the Preliminary Draft Budget of 2008. 

7. 

EVALUATION  OF  RISKS:  ECONOMIC  AND  FINANCIAL  SITUATION  OF  THE  THIRD 
COUNTRIES BENEFITING FROM THE MOST IMPORTANT EU LOAN OPERATIONS 

7.1. 

Introduction 

Previous sections of the report provide information on quantitative aspects of the risk borne 
by the Budget. However, the quality of the risks which depend on the type of operation and 
the standing of the borrowers (See Section 4.3) should also be assessed. Tables on the country 
risk evaluation are presented separately in the Commission Staff Working Paper. A summary 
of this analysis is provided below for the ten countries having the highest annual risk to the 
Budget in 2007. Section 2 of the Annex provides an analysis of eight further countries. 

7.2. 

Egypt 

The  economic  growth  of  Egypt  increased  from  4.6%  in  2005  to  6.8%  in  2006  due  to  the 
investment  policy  (especially  FDI)  and  strong  exports  of  goods  and  services.  Inflation  has 
been  reduced  to  single  digit  but  inflationary  tendencies  still  exist.  Unemployment  remains 
persistently high at more than 10% of the labour force. Despite the improvement of economic 
situation  and  the  sale  of  (semi-)state  owned  enterprises  the  general  public  deficit  hardly 
narrowed (7.9% in 2006 compared with 9.6% for 2005). Reforms in the financial sector are 
progressing.  The  banking  system  is  still  largely  dominated  by  the  State  despite  the  recent 
privatisation of one major bank. The reform of the financial sector should take two or three 
years before completion. Sound fiscal policy combined with adequate monetary policy should 
have positive effects on job creation.  

7.3. 

Turkey 

For Turkey, annual GDP growth amounted to 6.1% in 2006, as compared to 7.4% in 2005. 
Domestic  demand  grew  faster  than  total  output  which  caused  the  current  account  deficit  to 
widen  in  2006  to  7.9%  of  GDP  compared  with  6.3%  in  2005.  Private  consumption  slowed 
down in the second half of the year as a result of the monetary policy tightening that followed 
the volatility of May-June 2006. The reduction in growth is expected to continue in 2007 and 
the resulting stabilization of the current account deficit makes a soft-landing scenario a likely 
outcome. Although the current account has been comfortably financed, vulnerabilities remain 
as  a  reversal  of  flows  could  be  triggered  by  domestic  factors  or  an  external  shock.  A 
comparatively high level of external debt (almost 50% of GDP) makes Turkey vulnerable to 
significant depreciation of the currency. Factors making the economy more resilient to shocks 
include,  in  contrast  to  the  pre-2001  crisis  situation,  flexible  exchanges  rate  regime  and  a 

EN 

11 

   EN 

 
credible  and  independent  Central  bank.  The  official  reserves  of  the  Central  bank  amount  to 
about EUR 45 billion in 2006 or over 5 months of imports. 

7.4. 

Brazil 

Brazil's growth, after slowing in 2005, recovered in 2006 to about 2.9% on the back of robust 
consumer spending and a recovery in private investment. Disinflation continued in 2006 to its 
lowest level since the adoption of the inflation targeting regime in 1998. While export growth 
slowed substantially in 2006 as a result of previous currency appreciation, improving terms-
of-trade allowed the country to run a comfortable current account surplus in 2006 (estimated 
at  0.6%  of  GDP).  Brazil's  external  vulnerability  has  eased  with  its  external  debt  ratios 
declining significantly after the country fully repaid its debt to the IMF ahead of schedule at 
the end of 2005, and to the Paris Club in the first half of 2006. The country has also redeemed 
all its Brady Bonds. The external debt-over-GDP ratio has decreased from 36.4% in 2004 to 
18.9%  at  the  end  of  2006.  Efforts  to  reduce  public  external  indebtedness  are  paying  off: 
Brazil's sovereign credit has been upgraded by the leading credit-rating agencies. Significant 
vulnerabilities remain, however, despite recent progress with public debt management. Public 
debt remains above 50% and is highly exposed to interest rate variations as it has a relatively 
short average maturity.  

7.5.  Morocco 

The economy of Morocco has registered a real GDP growth of 8.1% in 2006. This situation is 
due mainly to the exceptional harvest in agriculture and, more generally, to the dynamism of 
the different economic sectors. Inflation is still low with an annual rate of 3.3%. The public 
deficit  has  been  reduced  at  2.1%  of  GDP  (compared  with  5.3%  for  2005).  Public  debt 
amounted to 57% of GDP. Unemployment is still at a rate of 9.7% while poverty (15% of the 
population under 2 USD per day) and high adult illiteracy (47.7%) still remain key challenges 
for Moroccan authorities.  

7.6. 

Tunisia 

Growth of the Tunisian GDP reached 5.8% in 2006 compared with 4% in the previous year 
(6% expected for 2007). Inflation accelerated from 2% to an annual rate of 4.7% for the first 
ten months of 2006 mainly due to the increase in international prices of oil. In order to curb 
this  tendency  the  Central  bank  was  forced  to  raise  its  key  interest  rate  in  2006  (first 
adjustment in three years). The current account deficit reached 2.6% of GDP and the debt of 
the  country  amounted  to  54.8  %  of  GDP.  Unemployment  is  still  high  with  an  average  of 
13.4% of the labour force. 

7.7. 

South Africa 

South  Africa  annual  GDP  growth  amounted  to  5.0%  (in  real  terms)  in  2006  after  5.1%  in 
2005. Growth is expected to nearly reach the 5% level in 2007. In 2006 the Central Bank has 
increased the refinancing rate from 7.0% to 9.0% to keep inflation within a 3% to 6% range. 
The  current  account  deficit  widened  to  5.6%  of  GDP  in  2006  from  3.8%  in  2005.  It  is 
expected to stay at around 5.0% in 2007. FDI and other capital inflows (portfolio investments) 
more than outweigh the current account deficit. This leads to increased net gold and foreign 
exchange reserves reaching 3 to 4 months of total imports. External debt to official creditors 
fell to 2.0% of GDP in 2006 - the lowest level in Sub-Saharan Africa (average 16%) - and is 
expected to fall to 1.9% in 2007. The fiscal deficit stayed at 0.4% of GDP in past two years 

EN 

12 

   EN 

 
and is expected to turn to a slight surplus in 2007 (0.3%). South Africa is a middle-income, 
emerging  market  economy  where  services  account  for  nearly  two  thirds  of  South  Africa's 
economy, while most exports are based on mining. The major risks are volatilities in capital 
inflows (portfolio investments), export commodity price shocks, and internal pressures arising 
from high unemployment, high inequality, high HIV/AIDS prevalence, and high crime rates.  

7.8. 

Lebanon 

The military conflict caused a very serious shock for the economy of Lebanon. In 2006 the 
national GDP decreased by 5% in real terms, the public deficit nearly doubled compared to 
2005 reaching 14% of GDP and the GDP and the government debt increased to a record-high 
190%  of  GDP.  No  statistical  data  regarding  unemployment  are  available  for  the  moment. 
Inflation is moderate with an annual rate of 5%. Lebanon remains one of the most indebted 
countries  in  the  world.  Debt  sustainability  is  at  serious  risk  due  to  the  immediate 
reconstruction needs following the 2006 war and the political instability caused by the lack of 
consensus on the necessary reforms. 

7.9. 

Jordan 

The Jordan's economy continued to grow strongly in 2006; real GDP growth is estimated at 
6% (2005: 7.2%). High levels of remittances and strong activity in the services sector boosted 
private  consumption.  The  unemployment  rate  decreased  from  14.8%  in  2005  to  13.9%  in 
2006.  The  inflation  rate  picked  up  in  2006  to  6.3%  (2005:  3.8%)  following  the  cuts  in  oil 
price subsidies. The authorities have intensified fiscal adjustment in 2005 and 2006 under a 
strategy  centred  on  eliminating  fuel  subsidies  and  maintaining  expenditure  restraint.  These 
efforts  brought  the  budget  deficit  (excl.  grants)  down  to  7.5%  of  GDP  from  10%  in  2005. 
External current account deficit (incl. grants) for 2006 decreased slightly from 17.8% in 2005 
to 16% of GDP (and compared to a surplus of 11.6% in 2003). Merchandise export growth 
remained  robust.  The  trade  deficit  decreased  from  47%  of  GDP  in  2005  to  37.1%  in  2006. 
The current account deficit continued, however, to be financed by exceptionally high capital 
inflows, including foreign direct investments, remittances and portfolio inflows. 

7.10. 

Serbia and Montenegro 

In Serbia annual GDP growth amounted to 6.3% (in real terms) in 2005. Growth continued at 
6.3% in the first quarter of 2006. The current account deficit reached 9.8% of GDP in 2005. It 
widened further in the course of 2006. Gross FDI inflows reached 6.1% of GDP in 2005 and 
the external debt of the country amounted to 66% of GDP at end-July 2006. Public debt has 
declined  following  the  EUR 600 million  Paris  Club  debt  write-off,  which  was  linked  to  the 
successful completion of the recent IMF programme in February 2006. 

In  Montenegro  annual  GDP  growth  amounted  to  4.1%  (in  real  terms)  in  2005.  Growth 
accelerated to 6.5% in the first semester of 2006. The current account deficit reached 12.2% 
of GDP in 2005. It further widened in the course of 2006. Gross FDI inflows reached 22.8% 
of GDP in 2005 and the external debt of the country amounted to 42.6% of GDP at the end of 
2005.  

In  July  2006,  following  the  declaration  of  independence  of  Montenegro,  the  Republic  of 
Serbia  and  the  Republic  of  Montenegro  concluded  an  internal  agreement  on  the  division  of 
financial rights and obligations following the succession of Serbia to the former state union. 

EN 

13 

   EN 

 
7.11.  Ukraine 

Real  GDP  growth  of  Ukraine  was  about  7%  (2.6%  in  2005).  The  current  account  turned 
negative  at  about  1.5%  of  GDP  against  a  surplus  of  3%  the  year  before,  driven  by  strong 
import  demand  and  higher  energy  import  prices  but  also  due  to  the  fluctuations  in  steel 
markets (Ukraine's main export sector accounting for 40% of total exports). Ukraine's public 
external debt declined to about 12% of GDP (15.3% in 2005), while the private sector's better 
access to foreign capital markets edged the total external debt to nearly 50% of GDP. Inflation 
accelerated  in  December  2006  to  11.6%  year-on-year,  partly  due  to  higher  prices  of  energy 
imports. The main risks still relate to the turbulent political situation and the ensuing lack of 
coherence  in  policy-making.  In  August,  Standard  &  Poor's  confirmed,  however,  Ukraine's 
sovereign  long-term  credit  rating  at  BB-,  supported  in  particular  by  the  low  level  of 
indebtedness. 

EN 

14 

   EN