Report from the Commission to the budgetary authority on guarantees covered by the general budget Situation at 31 December 2007 {SEC(2008) 2249}
Date: 2008-07-14
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), investment protection, report, third country

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.7.2008 
COM(2008) 451 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 31 December 2007 

{SEC(2008) 2249} 

EN 

   EN 

 
 
 
  
 
 
 
TABLE OF CONTENTS 

Introduction and types of covered operations .............................................................. 3 

New legal bases............................................................................................................ 3 

Events since the last report at 30 June 2007 ................................................................ 4 

Data on risks covered by the Budget ........................................................................... 4 

Definition of risk .......................................................................................................... 4 

Risk linked to Member States ...................................................................................... 5 

Risk linked to third countries ....................................................................................... 6 

Global risk covered by the Budget............................................................................... 7 

Evolution of risk........................................................................................................... 7 

Defaults, activation of Budget guarantees and arrears................................................. 8 

Payments from cash resources ..................................................................................... 8 

Payments from the Budget ........................................................................................... 9 

Activation of the Guarantee Fund for external actions ................................................ 9 

Guarantee Fund for external actions ............................................................................ 9 

Recoveries .................................................................................................................... 9 

Assets ........................................................................................................................... 9 

Target amount .............................................................................................................. 9 

Evaluation of risks: Economic and financial situation of third countries benefiting 
from the most important EU loan operations............................................................. 10 

Introduction ................................................................................................................ 10 

Candidate countries.................................................................................................... 10 

Potential candidate countries...................................................................................... 11 

New Independent States............................................................................................. 11 

Other non-member countries...................................................................................... 12 

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. 

7.5.1.  Mediterranean countries............................................................................................. 12 

7.5.2.  South American countries .......................................................................................... 14 

7.5.3.  South Africa ............................................................................................................... 14 

EN 

2 

   EN 

 
1. 

INTRODUCTION AND TYPES OF COVERED OPERATIONS 

This  report  is  submitted  pursuant  to  Article  130  of  the  Financial  Regulation  which  requires 
the  Commission  to  report  to  the  European  Parliament  and  to  the  Council  twice  a  year  on 
budgetary  guarantees  and  the  corresponding  risks1.  It  is  completed  by  a  Commission  Staff 
Working Paper with a set of detailed tables and explanatory notes (the "Annex")2. 

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  most  importantly  European  Investment  Bank  ("EIB")  external  financing3).  These 
operations have been covered since 1994 by the Guarantee Fund for external financing ("the 
Fund")4 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"5), 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  to  Member  States 
granted or guaranteed by the Community. 

2. 

NEW LEGAL BASES 

In the framework of the 2006 Council Decision6 to grant a renewed Community guarantee to 
the  EIB  against  losses  under  loans  and  loan  guarantees  for  projects  outside  the  Community 
(EIB external mandate 2007-2013, hereinafter the "new general mandate"), the Commission 
and  the  EIB  signed  a  Guarantee  Agreement  and  a  Recovery  Agreement  in  August 20077, 
laying down the detailed provisions and procedures relating to the Community Guarantee and 
the recovery of claims following a call on the Guarantee. The Guarantee Agreement covers 
EIB financing operations signed after 17 April 2007, the date of approval of the new general 
mandate by the EIB Board of Governors. 

1 

2 
3 

4 

5 

6 
7 

COM(2008)2 and SEC(2008)18 make up the previous report on the guarantees covered by the Budget 
at 30 June 2007. 
SEC(2008)[…]. 
The figures concerning the EIB mandates are displayed in Table A1 and references to legal bases are 
listed in Table A4 of the Annex. 
For the most recent report on the functioning of 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 of 31 October 1994 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  of  25 May 1999,  OJ  L  139,  2.6.1999,  p.  1,  Council  Regulation  (EC,  Euratom) 
No 2273/2004  of  22 December 2004,  OJ  L  396,  31.12.2004,  p.  28,  and  Council  Regulation  (EC, 
Euratom) No 89/2007 of 30 January 2007, OJ L 22, 31.1.2007, p. 1.  
Council Decision (EC) 2006/1016/EC of 19 December 2006, OJ L 414, 30.12.2006, p. 95. 
C/2007/3592. 

EN 

3 

   EN 

 
                                                 
Regarding macro-financial assistance provided to third countries, a new Council Decision was 
adopted on 10 December 2007 providing macro-financial assistance to Lebanon8. 

3. 

EVENTS SINCE THE LAST REPORT AT 30 JUNE 2007 

The  Council  Decision  for  an  MFA  loan  to  Lebanon  was  approved.  There  were  no 
disbursements under MFA and Euratom loans during the second half of 2007. 

As  mentioned  under  Section  2  above,  the  new  Guarantee  Agreement  with  the  EIB  covers 
financing operations signed after 17 April 2007. As of 31 December 2007, a total amount of 
EUR 3 165 million worth of EIB financing operations had been signed by the EIB, of which 
EUR  1  267  million  under  the  general  mandate  which  expired  on  31  July  20079  and  EUR 
1,898 million under the new general mandate 

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 
(72% of the total outstanding amount guaranteed as of 31 December 2007) 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 28% 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 (either directly or indirectly via the Fund): 

–  The  method  of  calculating  the  total  amount  of  capital  outstanding  for  the  operations 
concerned on a given date including accrued interest. 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. 

8 
9 

10 

Council Decision (EC) 2007/860/EC of 10 December 2007, OJ L337, 21.12.2007, p.111. 
The  general  Mandate  was  decided  in  the  framework  of  the  2000-2006  Financial  Perspective,  see 
Council Decision 2000/24/EC of 22 December 1999, OJ L 9, 13.1.2000, p. 24, as amended (hereinafter 
"the previous general mandate")  
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). 

EN 

4 

   EN 

 
                                                 
Table 1: Total outstanding amounts covered as of 31 December 2007 in EUR million 

Outstanding 
Capital 

Accrued Interest 

Total 

% 

Member States* 

MFA 

Euratom 

EIB 

Sub-total Member States* 

Third Countries 

MFA 

Euratom 

EIB 

Sub-total third countries 

Total 

253 

435 

4 060 

4 748 

534 

39 

11 729 

12 302 

17 050 

2 

7 

38 

48 

7 

1 

118 

126 

173 

255 

442 

4 098 

4 795 

540 

40 

11 848 

12 428 

1% 

3% 

24% 

28% 

3% 

<1% 

69% 

72% 

17 223 

100% 

*  This risk is directly covered by the Budget and includes Bulgaria and Romania as they have joined the EU on 

01.01.2007. 

Tables  A1,  A2,  A3  and  A4  of  the  Annex  provide  more  detailed  information  on  these 
outstanding amounts, in particular in terms of ceiling, disbursed amounts or guarantee rates. 

4.2. 

Risk linked to Member States 

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

In 2008, the Budget will bear a risk linked to Member States of EUR 769 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. 

EN 

5 

   EN 

 
 
 
 
 
 
 
 
 
 
 
Table  2:  Ranking  of  the  Member  States  according  to  the  exposure  with  regard  to  the 
maximum risk borne by the budget in 2008 (EUR million) 

Ranking 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Country 

Romania 

Bulgaria 

Poland 

Czech Republic 

Slovakia 

Hungary 

Slovenia 

Cyprus 

Latvia 

Lithuania 

Estonia 

Malta 

Total 

2008 

257.5 

158.1 

89.0 

88.8 

71.7 

38.2 

30.4 

15.3 

8.0 

6.9 

4.3 

0.8 

% 

33.5% 

20.6% 

11.6% 

11.5% 

9.3% 

5.0% 

4.0% 

2.0% 

1.0% 

0.9% 

0.6% 

0.1% 

768.9 

100.0% 

The risk on Member States concerns all Members States involved in the last two enlargements 
with maturities ending 2031. 

4.3. 

Risk linked to third countries 

In 2008, the Fund will bear a maximum risk related to third countries of EUR 1 322 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  2008.  The  economic  situation  of  these  countries  is 
analyzed and commented in Section 7 below. 

EN 

6 

   EN 

 
 
 
 
Table 3: Ranking of the 10 most important third countries according to the exposure 
with regard to the maximum risk borne by the Fund in 2008 
(EUR million) 

Ranking 

Country 

1 

2 

3 

4 

5 

6 

7 

8 

9 

Turkey 

Egypt 

Morocco 

Tunisia 

Brazil 

South Africa 

Serbia and 
Montenegro11 

Croatia 

Bosnia and Herzigovina

10 

Syria 

2008 

255.6 

199.3 

127.1 

121.9 

86.1 

84.3 

55.0 

38.5 

30.0 

27.9 

% of the total 
maximum risk 

19.3% 

15.1% 

9.6% 

9.2% 

6.5% 

6.4% 

4.2% 

2.9% 

2.3% 

2.1% 

Total of the 10 

1 025.6 

77.6% 

The Fund covers the guaranteed loans of 54 countries with maturities ending 2037. 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  2008  an  amount  of  EUR 2 091 million  representing  the 
amounts due during this period, of which 37% are due by Member States (see Table A2 in the 
Annex). 

4.5. 

Evolution of risk 

The  risk  towards  Member  States  should  decrease  in  future  as  the  loans  to  Member  States 
under Euratom, MFA or EIB guaranteed financing are reimbursed (see Graph A1 in Section 
1.3 of the Annex). 

11 

Now the Republic of Serbia and the Republic of Montenegro. 

EN 

7 

   EN 

 
 
 
 
 
 
 
                                                 
MFA loans to third countries are subject to individual decisions by the Council. The financial 
assistance granted under the Council Decision 2007/860/EC of 10 December 2007 providing 
macro-financial assistance to Lebanon consists of EUR 50 million in loans and up to EUR 30 
million in grants. The intention is to disburse the loan part in two equal tranches starting in 
2008. 

The Euratom lending to Member States or in certain eligible non-member countries (Russian 
Federation,  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 existing loan 
agreement  of  2004  to  K2R4  in  Ukraine  (EUR  equivalent  of  USD 83 million  Loan  Facility 
Agreement), of which EUR 39 million have already been disbursed, further tranches may be 
disbursed in 2008. 

The  previous  general  mandate  to  the  EIB  expired  on  31  July  2007.  At  this  date,  contracts 
corresponding to a total 98% of the overall ceiling under this mandate (EUR 20 060 million – 
see Table A5 of the Annex) had been signed. A total amount of EUR 7 663 million remains to 
be  disbursed  under  previous  EIB  mandates,  of  which  93%  relate  to  the  previous  general 
mandate12  and  should  be  disbursed  within  10  years  from  the  end  of  this  mandate,  as  the 
guarantee of the Community lapses at the end of this period13. 

The  most  important  item  that  will  impact  the  risk  for  the  Budget  in  future  is  the  recent 
Community  guarantee  granted  to  the  EIB  under  the  new  general  mandate.  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 million14.  An  amount  of  EUR 1 898  million  was 
signed during 2007 under this new mandate, of which EUR 1 820 million remain undisbursed 
at the end of 2007. 

In  Section  1.3  of  the  Annex,  Graph A2  presents  simulations  of  some  scenarios  of 
disbursements under the mandates preceding the new general mandate, as well as under the 
new general mandate, as those disbursements have a strong impact on the provisioning of the 
Fund. 

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. 

12 
13 

14 

15 

See Section 1.3 of the Annex. 
See  Article  1.06 of  the  Restated  and Amended Guarantee  Agreement  signed  between  the  EC  and  the 
EIB on 30 August/2 September 2005. 
Broken down into a basic ceiling of a fixed maximum amount of EUR 25 800 million and an optional 
mandate of EUR 2 000 million to be decided upon by the Council. 
See  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. 

EN 

8 

   EN 

 
                                                 
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 2007. 

5.3. 

Activation of the Guarantee Fund for external actions 

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 2007, the Fund was not called. 

The total arrears at 31 December 2007, i.e. penalty interests with the Republic of Argentina, 
amount  to  USD 1 718 493.12;  thereof  USD 1 448 433.44  (EUR  equivalent  983 923.27)  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  of  the  need  to  fully  clear  these  arrears  before  the  resumption  of 
new EIB lending financing in the country. 

6. 

GUARANTEE FUND FOR EXTERNAL ACTIONS 

6.1. 

Recoveries 

No recovery occurred in 2007. 

6.2. 

Assets 

At 31 December 2007, the net assets of the Fund amounted to EUR 1 026 515 043.63. 

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 
liabilities17 
Fund's 
(EUR 12 427 584 330.13) within the meaning of the Fund Regulation was 8.26%. 

(EUR 1 026 515 043.63) 

outstanding 

resources 

capital 

and 

At  year-end  2007,  the  Fund  resources  were  lower  than  the  target  amount.  According  to  the 
new  provisioning  rules  adopted  by  the  Council  on  30 January 200718,  a  provisioning  of 
EUR 91.60 million  was  inserted  in  the  Preliminary  Draft  Budget  of  2009  together  with  an 
amount of EUR 500 000.00 for the external evaluation under the mid-term review of the EIB 
external mandate pursuant to Council Decision 2006/1016/EC of 19 December.200619. 

16 
17 
18 
19 

For more details, see Section 1.4.3 of the Annex. 
Including accrued interests. 
Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007, OJ L 22, 31.1.2007, p. 1. 
OJ L 414, 30.12.2006, p.102. 

EN 

9 

   EN 

 
                                                 
7. 

EVALUATION  OF  RISKS:  ECONOMIC  AND  FINANCIAL  SITUATION  OF  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 above) 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 risk to the 
Budget in 2008 (see Section 4.3 above) and the countries having a direct exposure with the 
Community budget. 

7.2. 

Candidate countries 

In Croatia, real GDP (Gross Domestic Product) growth rose to 5.6% in 2007, up from 4.8% 
in  2006.  Growth  was  mainly  driven  by  an  acceleration  of  private  and  public  consumption 
growth, fuelled by strong, but decelerating credit growth, one-off payments to pensioners, and 
pre-election  spending.  The  growth  of  investment  slowed  to  6.5%,  from  10.9%  in  2006, 
reflecting a gradual termination of large public investment projects in the transport network. 
At  the  same  time,  private  investments  became  more  dynamic,  partially  reflecting  some 
improvements  in  the  overall  business  environment.  The  current  account  deficit  widened  to 
8.6%  of  GDP,  compared  to  7.9%  a  year  before,  mainly  on  account  of  a  higher  deficit  in 
merchandise trade, resulting from strong imports and a decline in the growth of exports in the 
fourth  quarter.  Net  inflows  of  FDI  (Foreign  Direct  Investment)  increased  significantly  and 
reached 9.1% of GDP, and thus more than off-set the current account deficit. Gross external 
debt  continued  to  increase,  driven  by  an  acceleration  of  direct  borrowing  of  the  corporate 
sector while the general government as well as the banking sector reduced their outstanding 
foreign liabilities. The gross external debt ratio increased from 85.5% of GDP at end-2006 to 
88.9% at end-2007. 

In  the  former  Yugoslav  Republic  of  Macedonia,  output  growth  accelerated  markedly  to 
about 5% (in real terms) in 2007, compared to 4% in 2006. Important sources for growth were 
exports of steel products and private consumption. The current account deteriorated during the 
last months of the year, reaching a deficit of nearly 3% of GDP end-2007. Gross FDI inflows 
came back to 4.8% of GDP end-2007, after a single privatisation project in the energy sector 
had  raised  FDI  inflows  to  nearly  6%  of  GDP  in  2006.  Early  debt  repayments  reduced  the 
external debt of the country to some 50% of GDP. 

In Turkey, annual GDP growth amounted to 4.5% in 2007, down from 6.9% in 2006. Higher 
inflation and a severe monetary policy tightening by the Central Bank in mid-2006 dampened 
domestic  demand  growth.  The  current  account  deficit  remained  constant  at  almost  6%  of 
GDP.  Gross  FDI  inflows  reached  3%  of  GDP  in  2007,  and  about  two  thirds  targeted  the 
financial  sector.  In  the  previous  year,  the  external  debt  of  the  country  fell  by  about  2 
percentage points to 37% of GDP by end-2007. At the same time, public debt fell to 39% of 
GDP from 46% of GDP in 2006. Turkish banks frequently borrow internationally to finance 
lending  domestically,  so  they  are  expected  gradually  to  feel  the  effect  of  the  global  credit 
squeeze. 

EN 

10 

   EN 

 
7.3. 

Potential candidate countries 

In Bosnia and Herzegovina real GDP growth decelerated from 6.7% in 2006 to 6% in 2007. 
In  2007  the  widening  of  the  trade  deficit  contributed  to  an  increase  of  the  current  account 
deficit from 8.4% of GDP in 2006 to 13.1% of GDP in 2007. The current account deficit was 
fully  financed  by  net  FDI  as  large  privatisations  in  the  Republika  of  Serbia  together  with  a 
relatively  better  performance  of  greenfield  investments  led  to  a  surge  in  FDI  to  13.8%  of 
GDP.  External  public  debt  declined  to  18.5%  of  GDP  at  the  end  of  2007,  while  the  total 
external debt is estimated below 50% of GDP. 

In Serbia real GDP grew by 7.5% during 2007. The current account deficit widened to 16% 
of  GDP,  driven  by  a  growing  trade  deficit  and  a  decline  in  net  current  transfers.  Net  FDI 
inflow declined to 5.1% of GDP while foreign borrowing grew to 10.3% of GDP. As a result 
of the slowdown in capital inflows, foreign exchange accumulation of the National Bank of 
Serbia fell to 3% of GDP. Foreign exchange reserves of the National Bank of Serbia stood at 
7.5  months  worth  of  imports  of  goods  and  services  at  the  end  of  the  year.  External  debt 
remained  at  62%  of  GDP  while  private  and  public  sector  external  debt  by  the  end  of  2007 
accounted for 41% and 21% of GDP, respectively. 

In  Montenegro,  GDP  estimates  points  to  an  expansion  of  the  economy  by  7%  in  2007 
supported  by  a  record-high  tourist  season,  and  the  rise  in  disposable  income  of  households 
boosted  by  the  rapid  lending  expansion.  The  current  account  deficit  strongly  deteriorated  to 
44.2% of GDP driven by the sizeable trade deficit and notably decreasing exports. Yet, FDI 
inflows surged by 56% over the year. However, concurrent huge outflows brought net FDI to 
23%  of  GDP.  The  public  debt  increased  to  32.4%  of  GDP  due  to  the  surge  in  domestic 
indebtedness.  By  contrast,  the  external  public  debt  was  down  by  8.3%  y-o-y  to  20.3%  of 
GDP,  following  several  early  repayments  to  multilateral  creditors  facilitated  by  the  good 
fiscal outcome. 

7.4. 

New Independent States 

In Georgia, the current account further deteriorated in 2007 reaching a deficit of nearly 20% 
of GDP, with a trade deficit of about 26% of GDP. Export diversification is underway in the 
aftermath  of  Russia's  trade  embargo,  but  the  overall  growth  in  exports  has  not  been  large 
enough  to  countervail  the  surge  in  demand  for  imports  in  general  and  the  impact  of  higher 
import  price  of  natural  gas.  The  current  account  deficit  was  however  financed  by  foreign 
capital inflows, including foreign direct investment that surged to USD 1584 million in 2007 
(USD 1076 million in 2006). Also, the banking sector has increased its borrowing in foreign 
capital  markets.  Economic  growth  was  robust  12.4%,  supported  by  strong  credit  growth, 
privatisation, foreign direct investment and structural reforms. Public spending (especially in 
the military) was increased in the course of 2007, and the fiscal deficit is estimated at 4.7% of 
GDP. As privatisation proceeds financed the deficit, public debt was stable in nominal terms, 
declining as a percentage of GDP to about 25% (external public debt about 17% of GDP). The 
main  economic  policy  challenge  has  been  to  keep  inflation  in  single  digits.  The  12-month 
inflation was 11% as of December 2007 and international commodity prices continue to put a 
pressure in consumer prices. Standard & Poor's maintained Georgia's sovereign credit rating 
at  B+  with  a  positive  outlook.  Fitch  assigned  Georgia  a  sovereign  credit  rating  BB-  with  a 
stable outlook in July 2007, reflecting notably the decline in the public debt burden. 

In Ukraine, real GDP growth was maintained at 7.3% in 2007, supported by a strong credit 
growth and increases in real incomes. The current account deteriorated somewhat, reaching a 
deficit of 4.2% of GDP. The trade deficit was 5.6% of GDP, driven by strong import demand 

EN 

11 

   EN 

 
and  higher  energy  import  prices.  Overall,  the  terms  of  trade  remained  however  positive  for 
Ukraine  thanks  to  high  steel  prices  in  the  world  markets  (Ukraine's  main  export  sector 
accounting  for  40%  of  total  exports).  Fiscal  deficit  was  kept  at  1.5%  as  robust  economic 
growth  supported  the  government's  revenue  collection.  Ukraine's  public  external  debt 
declined  to  about  10%  of  GDP,  while  the  banking  sector's  borrowing  in  foreign  capital 
markets drove the total external debt to about 60% of GDP. The 12-month inflation continued 
to  accelerate  in  late  2007,  reaching  16.6%  in  December  2007,  driven  by  food  prices  that 
account for about 50% of the consumption basket of the index. The main risks still relate to 
the turbulent political situation, which culminated in the pre-term parliamentary elections of 
September  2007.  The  thin  parliamentary  majority  of  the  government  that  came  to  power 
thereafter  and  the  continuing  political  struggle  between  the  key  political  actors  are  not 
conducive  for  the  necessary  structural  reforms.  Standard  &  Poor's  confirmed,  however, 
Ukraine's sovereign long-term credit rating at BB-, supported in particular by the low level of 
indebtedness of the public sector. 

Tajikistan’s  economy  has  continued  to  grow  strongly  in  2007,  recording  a  growth  rate  of 
7.8% of GDP. Following a budget surplus of 1.7% in 2006 the government budget is expected 
to  register  a  deficit  in  2007  of  14.1%  of  GDP  (IMF  estimate).  Thanks  to  the  successful 
bilateral debt agreements with mainly Russia – Tajikistan’s largest creditor – and debt relief 
from  the  IMF  MDRI  (Multilateral  Debt  Relief  Initiative)  initiative  in  2006,  external  debt 
initially had fallen to 33.6% of GDP in 2006, however following the sharply increased budget 
deficit in 2007, increased again to around 41.9% of GDP in 2007. A deteriorating trade deficit 
is  only  partly  offset  by  the  rapid  growth  in  foreign  remittances.  The  current  account  deficit 
has  increased  sharply  from  3.0%  in  2006  to  about  9.5%  in  2007.  Import  coverage  of  gross 
official  reserves  remains  relatively  low,  around  two  months  of  imports.  The  IMF  PRGF 
(Poverty  Reduction  and  Growth  Facility)  arrangement  was  successfully  completed  in  2006. 
The  authorities  have  started  the  preparation  of  a  successor  arrangement,  possibly  under  the 
PSI programme (IMF Policy Support Instrument). 

7.5. 

Other non-member countries 

7.5.1.  Mediterranean countries 

Morocco’s  economy  was  strongly  affected  by  the  droughts  in  2007;  the  fall  in  agricultural 
output resulted in a decline of economic growth from 8% in 2006 to 2.2% in 2007. The steady 
growth  of  non-agricultural  GDP  (5.5%  end-2007  up  from  5.2%  in  2006)  and  ongoing 
diversification  are  helping  to  increase  the  Moroccan  economy’s  resilience  to  shocks.  GDP 
growth is driven mainly by domestic demand: private consumption has been fuelled by urban 
wage  growth,  rapid  credit  expansion,  the  positive  evolution  of  the  labour  market,  and  high 
level of remittances; public consumption has strongly accelerated following the 8% increase 
in  recurrent  expenditures.  The  external  environment  remains  shaped  by  a  substantial  and 
widening  trade  deficit  (21.0%  of  GDP  in  2007).  In  2007,  for  the  first  time,  it  was  not  fully 
compensated  by  tourism  revenues  and  remittances,  and  Morocco's  current  account  was  in 
deficit. Rising GDP is expected to consolidate the steady fall in the external debt-to-GDP ratio 
to 22% of GDP at the end of 2007. The overall fiscal deficit is estimated to have significantly 
contracted in 2007 to 0.2% of GDP (excluding privatization receipts). Inflationary pressures 
were  kept  down,  with  average  inflation  of  2.0%  end-2007.  Moderate  price  increases  also 
reflect  the  strength  of  the  Moroccan  currency  (MAD).  The  current  exchange  rate  regime 
which pegs the MAD to an euro-dominated basket of currencies has resulted in deteriorating 
terms of trade owing to the MAD appreciation in line with the EUR-USD exchange rate. The 
authorities  have  decided  to  gradually  liberalise  the  external  capital  account,  which  would 

EN 

12 

   EN 

 
mean abandoning the current peg, moving towards a more flexible exchange rate regime and 
inflation targeting. 

the 

transportation  and 

the  energy  sector, 

the  non-textile  manufacturing, 

The economic growth of Tunisia accelerated from 5.5% in 2006 to 6.3% in 2007, originating 
the 
from 
telecommunication  services.  Despite  stronger  economic  growth,  unemployment  remained 
high at around 14%. A significant part of the unemployed people has a university degree. The 
central  public  deficit,  excluding  privatisations,  stabilized  around  3%.  The  prudent  fiscal 
policy  along  with  a  tightening  of  monetary  policy  has  been  beneficial  for  the  Tunisian 
economy because inflation remained moderate in 2007, at 3.1%. Fiscal discipline along with 
two increases in domestic oil prices helped to alleviate the fiscal burden of the oil subsidies. 
Due  to  the  higher  economic  growth  and  to  the  privatisation  receipts  mainly  used  for  debt 
amortization the central government debt has regressed and is expected to continue this trend 
in  the  near  future.  Debt,  for  a  major  part  foreign,  is  currently  still  above  50%  of  GDP;. 
However, Tunisia exhibits resilience in external shocks due to the long-term structure of the 
external  debt.  Public  debt  is  expected  to  decline  further  due  to  the  favourable  short  term 
economic outlook. 

The economic growth of Egypt accelerated from 6.8% in fiscal year 2006 to a record 7.1% in 
fiscal year 2007. Growth is underpinned by investment, especially foreign direct investments, 
and  private  consumption  (also  via  tourism).  Inflation,  reflecting  both  government  spending 
and  higher  food  import  prices,  surged  again  to  double  digits  in  fiscal  year  2007.  The  high 
inflation  seems  now  the  main  risk  for  macroeconomic  stability.  A  positive  sign  was  the 
slowdown of unemployment, but it remains relatively high at almost 10%. Despite the strong 
economic  growth  and  the  sale  of  (semi-)state  owned  enterprises,  the  general  public  deficit 
hardly  narrowed  (7.7%  in  fiscal  year  2007  compared  with  9.2%  for  fiscal  year  2006). 
Consequently, the gross government debt remained high, at almost 90% of GDP. Reforms in 
the  financial  sector  are  progressing.  Sound  fiscal  policy  combined  with  price  stability  will 
have positive effects on job creation. 

The  economy  of  Lebanon  is  recovering  from  the  2006  conflict  with  Israel  in  a  context  of 
continuous political stalemate and recurrent outbreaks of violence. Real GDP growth in 2007 
is estimated to 4%, a much better result than initially foreseen. Inflation has declined despite 
the  depreciation  of  the  US  dollar,  to  which  the  Lebanese  pound  is  pegged.  Reflecting 
reconstruction  needs,  the  current  account  deficit  is  estimated  to  have  increased  to  10.7%  of 
GDP. However, it is largely financed by official inflows and foreign direct investment. The 
fiscal deficit was contained on the back of stronger than projected revenue collection. Public 
debt-to-GDP  ratio  decreased  slightly  (to  171%  by  the  end  of  2007),  but  remains  very  high. 
The government continues to strike a careful balance between reconstruction and social needs, 
and  the  challenges  resulting  from  the  large  public  debt  overhang.  Fiscal  policy  aims  at 
containing  the  primary  deficit  while  accommodating  reconstruction  and  relief  spending. 
Lebanon's  financing  arrangement  with  the  IMF  concluded  in  April  2007  under  the  Fund's 
Emergency Post-Conflict Assistance (EPCA) was successfully completed in early 2008. 

The  economic  growth  of  Syria  moderated  to  3.9%  in  2007  from  4.4%  in  2006,  largely 
because  of  falling  oil  output  and  adverse  weather  conditions  which  affected  corps.  These 
negative trends are expected to be offset in the future by persistent expansion in the services 
sector, boosted by solid growth in tourism and demand for goods and services, in part from 
the large Iraqi refugee population. The expected recovery in the agricultural sector will also 
underpin economic growth. Inflation rate rose on average by 5.5% in 2007 mainly due to the 
presence of the Iraqi refugees but also as a result of the tourism-related demand for food and 

EN 

13 

   EN 

 
the  higher  food  and  oil  prices.  The  decline  in  oil  output  and  the  escalating  cost  of  the 
subsidies  bill  resulted  in  a  fiscal  deficit  of  5.0%  of  GDP  in  2007.  Despite  the  increased 
revenues from telecommunication sector and a slight improvement in tax revenues, the fiscal 
situation  in  2008  is  expected  to  deteriorate  as  the  elimination  of  subsidies  has  not  been 
decided and the implementation of VAT has been postponed for 2009. As a result, public debt 
increased  to  37.8%  of  GDP  in  2007  and  is  expected  to  reach  41%  of  GDP  in  2008.  Syria's 
poor  payment  record,  budget  deficits  and  falling  oil  output,  as  well  as  the  slow  pace  of 
economic  reforms  and  the  risk  of  international  sanctions,  undermine  the  country's 
creditworthiness. 

7.5.2. 

South American countries 

Supported  by  rising  commodity  prices  and  a  still  very  favourable  global  economic 
environment,  Brazil  posted  a  5.4%  GDP  growth  rate  in  2007.  Economic  growth  was 
primarily  driven  by  domestic  demand,  with  capital  formation  showing  double-digit  growth 
(+13.4%).  Private  consumption  also  performed  strongly  with  a  growth  rate  of  6.5%.  With 
domestic  demand  very  strong,  the  current  account  surplus  declined  from  1.3%  of  GDP  in 
2006  to  0.3%  last  year.  Due  to  the  high  inflow  of  both  direct  and  portfolio  investment,  the 
balance of payment posted a surplus of USD 87.5 billion. Having succeeded in paying back in 
2006  all  its  outstanding  debt  of  Brazil  to  the  IMF  and  the  Paris  Club,  Brazil's  foreign  debt 
ratios  have  declined  significantly.  Also,  the  country  has  accumulated  foreign  exchange 
reserves of USD 180 billion, or 14% of GDP. All this had made Brazil clearly less vulnerable 
to externally induced economic turmoil than in the past. 

Led by strong domestic investment and consumption, the Argentinean economy continued to 
grow  strongly  in  2007,  with  GDP  expanding  by  8.7%.  With  final  demand  being  strong, 
imports jumped by 19.5% on the year compared to a growth rate of 7.5% for exports. As net 
FDI inflows  remained close  to 2 ½% of GDP,  Argentina's foreign exchange reserve rose to 
USD  46.9  billion  (18.6%  of  GDP)  and  total  external  debt  declined  from  51.5%  of  GDP  in 
2006 to 45.2% of GDP last year. The situation of public finances, however, has deteriorated 
somewhat  in  2007  as  government  consumption  expanded  at  double-digit  figures  in  the 
presidential  election  year.  With  government  consumption  likely  to  normalize  again 
Argentinean growth is projected to decelerate to around 6% of GDP in the current year. These 
positive developments are overshadowed by the deterioration in the inflation outlook, which 
partly  reflects  the  strength  of  domestic  demand  and  a  policy  of  maintaining  a  relatively 
undervalued peso. Argentina remains in arrears to the EIB, having failed to pay the penalty 
interest (US$1.7 million) steaming from previous arrears on a Regional Road Transportation 
project. Also, it has not normalised yet its relations with the Paris Club. 

7.5.3. 

South Africa 

In  South  Africa  real  GDP  growth  in  2007  reached  5.1%  with  strong  contributions  from 
construction  and  financial  sectors.  Export  volumes  rose  strongly  in  the  end  of  2007,  led  by 
mining  products  where  inventories  were  run  down,  while  export  prices  where  strong.  Real 
imports remained high, while average import prices rose somewhat, reflecting e.g. the higher 
price of crude oil. For 2007 the current account deficit increased further to 7.3% of GDP. The 
net  capital  inflow  was  sufficient  to  further  increase  foreign  exchange  reserves  relative  to 
imports (13.5 weeks). The nominal effective exchange rate of the rand depreciated by 3.5% 
during 2007, but depreciated by 13.5% over the first two months  in 2008 due to sentiments 
regarding  the  prospects  of  economic  growth  for  export  volumes  arising  from  electricity 
shortages.  Alongside  rising  international  prices  of  energy  and  food,  this  continued  to  cloud 

EN 

14 

   EN 

 
inflation prospects with CPI accelerating to 9.4% p.a. in February 2008. Inflation is expected 
to  reach  its  peak  in  the  first  half  of  2008.  The  widening  current  account  deficit  and  the 
reliance  of  portfolio  inflows  have  raised  the  vulnerability  to  external  shocks.  However,  the 
country's  strong  fundamentals  should  limit  the  adverse  impact  of  these  shocks  on  the 
economy.  Internal  pressures  might  arise  from  energy  shortages,  high  unemployment,  high 
inequality, high HIV/AIDS prevalence, and high crime rates. 

EN 

15 

   EN