COMMISSION STAFF WORKING DOCUMENT
Date: 2013-12-12
Institutions: European Commission
Subjects: EIB loan, budgetary reserve (EU), general budget (EU), investment protection, third country













EUR-Lex - 52013SC0504 - EN











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52013SC0504

COMMISSION STAFF WORKING DOCUMENT /* SWD/2013/0504 final */









Table of Contents
1............ Introduction. 3
2............ Situation of risks
covered by the EU Budget 3
2.1......... Overview of capital loan
operations covered by the EU guarantee. 3
2.2......... Risk factors. 5
2.3......... Cumulative and annual EU
Budget guarantee exposures. 6
2.4......... Loan operations covered
by the EU Budget guarantee. 9
2.5......... Evolution of risk. 12
2.5.1...... Situation of loans to
Member States at 31 December 2012. 12
2.5.2...... Situation of loans to third
countries. 13
2.5.3...... Borrowing/lending
operations. 15
2.5.4...... Guarantees given to third
parties. 16
2.5.5...... Default interest penalties
for late payment 16
3............ Country-risk
evaluation. 16
3.1......... Candidate countries. 17
3.1.1...... Former Yugoslav Republic of
Macedonia. 17
3.1.2...... Montenegro. 18
3.1.3...... Serbia. 19
3.1.4...... Turkey. 21
3.2......... Potential candidate
countries. 22
3.2.1...... Albania. 22
3.2.2...... Bosnia and Herzegovina. 23
3.3......... ENP countries. 24
3.3.1...... Armenia. 24
3.3.2...... Ukraine. 26
3.4......... Mediterranean partners. 27
3.4.1...... Egypt 27
3.4.2...... Lebanon. 29
3.4.3...... Morocco. 30
3.4.4...... Syria. 32
3.4.5...... Tunisia. 33
3.5......... Other countries. 35
3.5.1...... Brazil 35
3.5.2...... South Africa. 36
3.5.3...... Tajikistan. 37
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 2012. 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. The third
countries representing important risks to the EU Budget during the second semester
2012, 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 in section 3. The
evaluation comprises short analyses and tables of risk indicators.
The evaluated countries are grouped in 5
sub-sections: candidate countries (3.1), potential candidate countries (3.2), European
Neighbourhood Policy (ENP) countries (3.3), Mediterranean partners (3.4), and
other countries (3.5).
2.           Situation of risks covered
by the EU Budget
2.1.        Overview of capital loan
operations covered by the EU guarantee
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
in respect of these operations and must not be read as meaning that these
amounts will actually be drawn from the Fund or the EU Budget.
·                        
Explanatory notes to table (A1)
(a)                   
Authorised ceiling (Table A1)
This is the aggregate of the maximum
amounts of capital authorised (ceilings) for each operation decided by the
Council or by the European Parliament and the Council.
(b)                   
Capital outstanding (Table A1)
This is the
amount of capital still to be repaid on a given date in respect of operations
disbursed.
(c)                   
Remainder to be disbursed (Table A1)
Amount of loans signed, but  not yet
disbursed at the reporting date.
·                        
EIB financing operations
In the past, EIB financing operations
represented the largest category of the total loan operations covered by the EU
Budget. At the date of this report, they still amount to 31%. However, the
implementation of the EFSM gradually increases the portion of the risk borne by
the EU Budget that relates to the Member States.
The following table provides further
details on the breakdown of EIB financing operations.
2.2.        Risk factors
Factor increasing the risk:
·      the interest on the loans must be added to the authorised ceiling.
Factors reducing the risk:
–                        
limitation of the guarantee given to the EIB[1]:
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 non‑Member States authorised by
Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC;
The 65% guarantee rate covers two different
mandates:
·   
regarding the 2000/2007 Mandate, the EU Budget
guarantee is restricted to 65% of the aggregate amount of credits opened (i.e.
loans signed and not cancelled) plus all related sums authorised by Council
Decisions 1999/786/EC[2]
and 2008/580/EC (codified version)[3],
·   
for the 2007-2013 Mandate, the EU Budget
guarantee is restricted to 65% of the aggregate amount of credits disbursed and
guarantees provided under EIB financing operations, less amounts reimbursed,
plus all related amounts authorised by Decision No 1080/2011/EU of the European
Parliament and of the Council of 25 October 2011 granting an EU guarantee to
the European Investment Bank against losses under loans and loan guarantees for
projects outside the Union and repealing Decision No 633/2009/EC[4],
–                        
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 remaining risks.
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 up to
the date of the report are converted into EUR.
2.3.        Cumulative and annual EU
Budget guarantee exposures
With the cash flow approach based on the
existing loans disbursed it is possible to calculate the total capital exposure
of the Budget and the total capital and interest payments due to be received
each year. The following table A2 includes the estimated amount of principal
and interest due each financial year by each country according to disbursements
made until 31 December 2012[5].
Table A2: Total Annual Risk borne by the EU
Budget in EUR million based on the amounts (capital and interest) due under all
operations (MFA, BOP, Euratom, EFSM and EIB) disbursed at 31.12.2012.
2.4.        Loan operations covered by
the EU Budget guarantee 
The EU
Budget covers two types of lending operations. These are:
(a)                   
Lending operations to Member States.
These relate to BOP, EFSM, and to lending granted to certain Member States prior
to their EU accession under MFA, Euratom (table A3a) and EIB guaranteed lending
operations (table A4). 
(b)                   
Lending operations to non Member States
are covered by the Guarantee Fund for external actions. These include MFA,
Euratom (Table A3b) and EIB guaranteed lending operations to third countries
(table A4).
2.5.        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 guaranteed 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.
2.5.1.     Situation of loans to Member States at 31 December 2012
With the implementation of the EFSM the
total risk towards Member States including BOP, Euratom, EIB and MFA lending
has drastically increased since 2011. 
EFSM assistance
for Ireland and Portugal reached a total of respectively EUR 21.7 billion and
EUR 22.1 billion at 31.12.2012. 
Total outstanding for BOP loans amounted
to EUR 11.4 billion.
Regarding Euratom loans, no
disbursement took place during the second semester of 2012. EUR 6.5 million
were reimbursed by Bulgaria so that the outstanding for Member States is EUR 387
million.
Member States represent 73% of the EU
Budget exposure (cumulated total risk borne by the EU Budget, see table A2 of
the SWD) with the following breakdown between the financial instruments: 
Graph A1: Total Annual Risk to the EU
Budget[6]
relating to Member States at 31.12.2012 (EUR million) for the period 2013-2020
2.5.2.     Situation of loans to third
countries
At 31 December 2012, a total of EUR 1,496
million remained to be disbursed (loans signed but not yet disbursed) by the
EIB under the EUR 20,060 million EIB external lending mandate for 2000
– 2007:
At the same date, an amount of EUR 11,909
million remained to be disbursed under commitments made under the EIB external
mandate for 2007-2013.
For both mandates (2000-2007 and
2007-2013), loans have to be drawn within 10 years from
the end of the Mandate.
Graph A2: Total Annual Risk borne by the
EU Budget related to third countries (EUR million) at 31.12.2012 for the
period 2013-2020
Graph A2 presents the result of
simulations aiming at estimating the outstanding amount covered by the Fund for
the period 2013 to 2020. These simulations are based on disbursements of loans
signed and disbursed at the reporting date under all EIB mandates. As graph A2
illustrates, the weight of MFA and Euratom loans are marginal in the total
annual risk.
Payment under
the EU Budget guarantees
The EU borrows on financial markets and on‑lends
the proceeds to Member States (balance of payment, EFSM) and to third
countries (macro-financial assistance) or utility 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.
2.5.3.     Borrowing/lending
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 Article 12 of
Council Regulation No 1150/2000[7],
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 7 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 is beeing applied for the EFSM loans with 14
days lead time.
In a second step, the treasury situation
would be regularised as follows:
Euratom and MFA loans
a)           if the payment delay reaches three months after the due
date:
-       for loans outside the EU, the Commission draws on the Guarantee Fund
to cover the default and to replenish its treasury; 
-       for loans inside the EU, the amounts are directly covered by the EU
Budget.
b)           the Commission might also need to
draw on the EU Budget, most likely by means of a transfer, to provide the
corresponding budget line under article "01 04 01 European Union
guarantees for Union and Euratom borrowing operations and for EIB lending
operations" 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[8]
and the transfers are likely to require advance authorisation by the budgetary
authority. 
c)           The recovered funds may either be
re-paid to the EU Budget or kept on the Guarantee Fund account (the next annual
provisioning from the EU Budget being reduced accordingly).
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 04 01 01 European Union guarantee for Union
borrowings for balance-of-payments support" or "01 04 01 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.
2.5.4.     Guarantees given to third
parties
The EU provides a guarantee in respect of
financing granted by the EIB under the external mandates. When the recipient of
a guaranteed loan fails to make a payment on the due date, the EIB asks the
Commission to pay via the Guarantee 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[9]
or directly from the EU Budget should the resources of the Fund be insufficient[10].
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.
2.5.5.     Default interest penalties for
late payment
(a)                   
EU or Euratom loans
For loans granted by the EU or Euratom,
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
Third countries benefitting from
MFA/Euratom loans and/or representing important risks to the EU Budget during
the second semester 2012, 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 maroeconomic analyses and tables of risk indicators. The evaluated
countries are grouped in 6 sub-sections: candidate countries (3.1) Candidate
countries, (3.2) Potential candidate countries, (3.3) ENP countries, (3.4) Mediterranean
partners and (3.5) other countries. 
Explanatory notes for country-risk
indicators
Abbreviations and English words 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
Standard footnotes used in the table
1)           Includes only EU and EIB loans
(outstanding disbursements) to CEEC[11],
NIS[12]
and MED[13].
2)           The higher the ranking number,
the lower the creditworthiness of the country. 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.
3.1.        Candidate countries
3.1.1.     Former Yugoslav Republic of Macedonia
Economic output remained stable in 2012,
slightly declining by 0.2% year-on-year, compared to an increase in GDP of 2.8%
the year before. Exports, which in the past were an important source of growth,
remained at a similar level as the year before. On the other hand, investment
remained strong, increasing by some 16%, largely compensating weak private
consumption, which declined by 1.2%. This remarkable decline in private consumption
probably reflects continued losses in real disposable income. However, current
transfers from abroad, such as workers remittances, income from cross-border
trade, foreign loans but also higher FDI inflows continued to support the
economic activity. As a result of the high import content of capital formation,
imports rose by 4.2% in real terms, which together with declining exports
resulted in a negative contribution of net exports by some 1.4%. The trade
deficit rose by 1.5% of GDP in 2012, while worker remittances further increased
by nearly 2% to about 22% of GDP. This helped to contain the increase in the
current-account deficit to 3.9% of GDP, compared to 3% the year before. 
Inflation picked up in the second half of
2012, bringing average inflation for 2012 to 3.3%, clearly above the central
bank's inflation target. The main factors behind the strong inflation were
agricultural products, but also housing, textiles and energy. The situation in
the labour market improved in the last quarter of 2012, with a strong
employment increase of 2.8% year-on-year. However, for the whole year,
employment growth was 0.8% only, which helped to bring down the unemployment
rate from 31.4% in 2011 to 31.0% in 2012. Public finances registered a
significantly weaker-than-expected revenue performance in 2012, which resulted
in a rise in the deficit from 2.5% of GDP in 2011 to 3.8% in 2012, above the
revised deficit target of 3.5% of GDP. Gross external debt rose from 65% of GDP
at the end of 2011 to 69% by end of 2012. Both, public and private debt
contributed to this rise, although private debt rose somewhat faster than the
public one. Monetary policy maintains an informal peg to the euro, resulting in
a largely unchanged exchange rate at around 61.5 MKD/EUR.
3.1.2.     Montenegro
After two years of moderate growth, the
economy entered into a mild recession in 2012. Real GDP contracted by 0.5%,
pulled downward by poor performance in the following sectors: industry,
construction, financial services and agriculture. The unilateral use of the
euro implies that there is only limited scope for domestic monetary policy
instruments. While the foreign exchange risk is reduced, external financing
risks remain significant. In 2012, despite consolidation efforts, the budget
deficit remained very high at 5.3% of GDP, and considerably above the target
(2.4% of GDP), reflecting weaker-than-expected growth together with the
activation of state guarantees and the accumulation of tax arrears. As a
result, public debt climbed to 51% of GDP in 2012, up from 46% a year before.
The increase in public debt was driven by the rapid expansion of the external
debt (+22% year-on-year), which accounts for 75% of the total public
indebtedness. 
In 2012, the merchandise trade deficit
widened to 41.8% of GDP compared to 40.4% of GDP a year before. The increase in
tourism revenues and higher surpluses from transfers of Montenegrin workers
abroad compensated for the expansion of the trade deficit. As a result, the
2012 current account deficit remained at the same level as in 2011 (around
17.6% of GDP). The financial account balance covered 69% of the current account
deficit, while the remaining 31% were attributed to net errors and omissions
related to unrecorded revenues from tourism, remittances and other unregistered
cash payments. In 2012, after two consecutive years of contraction, net foreign
direct investment (FDI) climbed by 16.6 % year-on-year to 13.6 % of GDP. A
cutback in capital inflows, notably in greenfield investments, remains a major
risk, as it would depress domestic demand and further weaken fiscal
performance, given the reliance of indirect tax revenue on imports.
3.1.3.     Serbia
Following two years of mild recovery, real
GDP is estimated to have dropped by 1.7% in 2012. Inflation accelerated sharply
since April 2012 and reached double-digit levels in the autumn, mainly as a
result of rising food prices and the depreciation of the dinar. It peaked at
12.9% (year-on-year) in October 2012, influenced by increased indirect taxation
(VAT hike from 18 to 20%), before decelerating slightly to 12.2% in December. 
The budget deficit increased strongly in
2012 to an estimated 6.4% of GDP. In the autumn, the government adopted a
number of measures, mostly on the revenue side, to stem the deterioration in
public finances. Government debt increased, approaching 60% of GDP by the end
of 2012 – far above the legally binding limit of 45%. The overall uncertainty
prior to the general elections in mid-2012, the unchecked fiscal expansion and
deteriorating external imbalances led to a strong depreciation of the dinar.
Since early August 2012, when it reached its low for the year, the dinar has
stabilised and even regained some of the lost ground against the euro. In view
of depreciation pressures and increased inflationary expectations, the central
bank raised its main policy interest rate in several steps from 9.5% in June
2012 to 11.5% in January 2013. 
External imbalances increased in 2012,
driven by subdued export performance and growing imports, especially in the first
half of the year. The current account deficit is estimated to have widened to
10.5% of GDP. The trend of decreasing reserve assets was reversed in October
2012 and, boosted by external government borrowing, foreign exchange reserves
of the central bank increased further, reaching 10.9 EUR billion by the
end-2012 and covering more than 7 months' of imports. Foreign debt increased as
well, adding EUR 1.6 billion since the beginning of 2012, to EUR 25.7 billion
(86% of GDP). The deteriorating fiscal performance, among other factors,
triggered a downgrade of Serbia’s long term sovereign credit rating in August.
The completion of the first review of the precautionary Stand-By Arrangement
with the IMF of September 2011 has not been finalised because the 2012 budget
deviated from the agreed fiscal programme.
3.1.4.     Turkey
In 2012, the Turkish economy continued a
slowdown which had started in the middle of the previous year. Year-on-year
growth rates declined gradually from 5.3% in the fourth quarter of 2011 to 1.4%
in the fourth quarter of 2012 while annual GDP growth dropped from 8.8% in 2011
to 2.2% in 2012. The slowdown was partly induced by a tightening of monetary
policy and was accompanied by a rebalancing of growth from domestic demand to
foreign trade. Despite the slowdown, employment increased by 4.3% in the course
of the year. However, since the labour force expanded even faster, the
unemployment rate rose by 0.3% to 9.5%. Inflationary pressures receded with
headline inflation falling from 10.5% at the end of 2011 to 6.2% at the end of
2012 in the context of an appreciating Turkish lira, a softening of food
prices, and emerging economic slack. 
The current account narrowed to 6.0% of GDP
in 2012 from 9.7% of GDP in the preceding year as exports surged while imports
declined. Most of the rise in exports was due to an extraordinary rise in gold
exports. Over the course of the year, official foreign exchange reserves
(including gold) rose by 25% to EUR 105 billion, or 17% of GDP. Gross external
debt increased in absolute terms, but fell by 1.8% to 42.5% as a share of GDP
due to high nominal GDP growth. The fiscal deficit of the general government is
estimated to have more than doubled to 2.3% of GDP due to expenditure overruns
and the economic slowdown. However, the general government's debt-to-GDP ratio
fell by 2.9% to 36.2% over the year due to high nominal GDP growth. The central
bank started to ease monetary policy in the second half of 2012 when economic
activity had stabilised and the Turkish lira had noticeably strengthened.
3.2.        Potential candidate countries 
3.2.1.     Albania
According to preliminary data, economic
growth slowed to 1.6 % in 2012 from 3.1 % a year earlier. Financial
constraints, low confidence among consumers and investors and the presence of
spare production capacity held back private consumption and investment. Net
exports were the main contributor to economic growth, with exports holding up
and imports declining due to weak domestic demand. The current account deficit
narrowed to 10.5% of GDP in 2012 from 13% a year earlier on the back of a still
very large but contracting trade deficit (amounting to 19 % of GDP). Net
foreign direct investment (FDI) inflows remained at the same level in 2012 as
in 2011 and financed some 70 % of the current account deficit, up from 60 % in
2011. Labour market conditions improved somewhat during 2012, but unemployment
remained high at 13.0%, down slightly from 13.4 % in 2011. Long-term
unemployment accounts for around two thirds of total jobseekers, reflecting its
structural nature. The average inflation rate decelerated from 3.5 % in 2011 to
2% in 2012, which corresponds to the lower end of the Bank of Albania’s target
range of 2-4 %. Low inflation reflected the negative output gap, well-anchored
inflation expectations and the absence of supply-side shocks. The Albanian lek
continued to remain stable in 2012, marking a slight appreciation by 0.9 %
against the euro. 
In the wake of weak revenue collection, the
government deficit reached 3.4 % of GDP in 2012, exceeding the 3 % target in
the initial budget but slightly lower than the 2011 deficit of 3.5 %.  Public
debt remains high and increased further from 59.4 % of GDP in 2011 to 61.5 % by
the end of 2012, exceeding the statutory ceiling of 60 %, which has been
abolished. The banking system remains well capitalised and liquid. However,
non-performing loans remain a cause for concern, while the sharp deceleration
of credit growth is detrimental to the economy.
3.2.2.     Bosnia and Herzegovina
Following a moderate recovery in 2010 and
2011 (0.7% and 1% increase in GDP, respectively), real GDP growth in 2012 is
estimated to have turned negative (-1.7%) due to worsened external demand and
challenging domestic conditions. However, high frequency indicators for the
first half of 2013 show some signs of a bottoming out. The current account
deficit in 2012 remained broadly unchanged from 2011 (-9.5% of GDP) as falling
exports went hand in hand with a decrease in imports. On the financing side,
net FDI in 2012 increased to 3.5% of GDP up from 2.1% of GDP in 2011, covering
some 37% of the current account deficit. At the same time, gross foreign
reserves of the Central Bank of Bosnia and Herzegovina remained at fairly
comfortable levels (EUR 3.4 billion, 24.5% of GDP), covering nearly six months
of imports. Labor market conditions deteriorated somewhat and the unemployment
rate inched up further to an average of 44.5% in 2012 with the construction and
the retail sales sectors posting the most pronounced increase. Owing to lower
food and fuel prices, inflation has been on the decline since mid-2012 coming
down to an average of 2.1% in 2012 and has been decreasing further in the
course of 2013 (0.5% as of June 2013). 
The banking sector remains fairly sound
despite its high dependency on foreign funding and bank profitability has
recovered somewhat. Credit growth in 2012 remained broadly on the same level as
in 2011 (4.9% and 5.6%, respectively) as a slowdown of claims of the non-bank
private sector was fairly compensated by an acceleration of public sector
borrowing. On a negative note, bank asset quality has been deteriorating
further and reached 13.5% of total loans as of end-2012. In the course of 2012,
public finances registered a weaker-than-expected revenue performance reflecting
the worsened external environment, which coupled with growing total spending
resulted in an increase of the budget deficit to 2% of GDP up from 1.3% in
2011. Consequently, public debt increased by 9%, with the total debt-to-GDP
ratio estimated at 44% in 2012. In July 2013, the IMF Board completed the third
review under the two-year SBA which resulted in the release of a tranche in the
amount of EUR 38.9 million.
3.3.        ENP countries 
3.3.1.     Armenia
Driven by mining, services and agriculture,
economic activity grew by 7.2% in 2012, compared to 4.7% in 2011. The Armenian
economy is expected to continue to grow in 2013, although at slower pace.
Consumer price growth remained moderate, with year-on-year inflation limited to
3.2% in December 2012, although it rebounded slightly to 3.9% in April 2013 as
a result of increasing global energy prices. The fiscal position continued to
improve in 2012 thanks to stronger revenue performance and some under-spending
in some infrastructure projects. As a result, fiscal deficit decreased from
2.8% of GDP in 2011 to 1.6% of GDP in 2012. 
Armenia's external situation improved
marginally in 2012 but remains fragile. The current account deficit remains
large at 10.6% of GDP in 2012 (a marginal improvement from 10.9% in 2011 on the
back of growing remittances and exports), which underlines a critical need to
strengthen the economy. FDI increased marginally to reach EUR 359 million in
2012. By December 2012, foreign reserves dropped to 4.2 months of next year's
imports (from 4.6 months in December 2011), as a result of heavy interventions
by the central bank to limit the depreciation of the dram.
Public debt increased gradually and
substantially from 16% of GDP in 2008 to 45% of GDP 2012. The total external
debt-to-GDP ratio increased from 72% in 2011 to 77% in 2012. The debt servicing
ratio of the total external debt reached 27% of exports of goods and services
in 2012 and is expected to remain high in the next few years, as since April
2013 Armenia is no longer eligible to IMF's concessional financing and will
possibly get lower concessional support from other international financial
institutions. However, both the IMF Debt Sustainability Analysis (February
2013) and the Sixth Programme Review (June 2013) conclude that Armenia's public
and external debt dynamics are sustainable.
In June 2013, the IMF Board successfully
completed its sixth and final review of Armenia’s performance under the
three-year programme supported by Extended Fund Facility and Extended Credit
Facility arrangements. Given Armenia's financing needs in the next few years,
inter alia, due to external debt repayments, the country is in discussions with
the IMF for a new financing arrangement.
3.3.2.     Ukraine
Ukraine's real GDP growth slowed
significantly in 2012 to 0.2% compared to 5.2% in 2011 and 4.1% in 2010. This
disappointing growth performance is mainly a consequence of the more
challenging global economic environment and the worsening domestic business
climate, but also tight monetary policy, to stave off currency depreciation.
The economy would presumably have entered recession if the government had not
sustained public investment in the run-up to the Euro 2012 football
championship and loosened fiscal policy before the October 2012 parliamentary
elections. 
Inflation remains at its lowest level for a
decade, reaching -0.2% end-of-year 2012, as food prices declined,
administrative tariffs were kept flat, and as the National Bank of Ukraine
(NBU) kept the refinancing rate high with a view to limiting downward pressure
on the exchange rate. The NBU's current focus on supporting the currency has
resulted in a decline of the foreign exchange reserves by about one fourth in
2012, to EUR 19.1 billion, or 2.8 months of imports, at end-2012. While
administrative measures and market interventions to stabilize the hryvnia
provided some short-term relief, the currency peg is unsustainable in the
medium term against the background of the persistently large current account
deficit and slowing growth. 
The balance of payments situation continued
to deteriorate in 2012, with the current account deficit widening to 8.2% of
GDP from 6.3% a year earlier as a result of higher energy import prices and
weak external demand for traditional Ukrainian exports. There are also significant
risks to the financial account if foreign banks continue to deleverage and as
FDI inflows remain subdued as a consequence of the deteriorating business
climate. Ukraine's vulnerability to external shocks, such as a new oil price
spike or a slump in steel prices, remains high. Overall, 2012 was a
disappointing year for Ukraine due to both sluggish economic growth and low
international creditworthiness. Expectations are that the economy will not
start to pick up before 2014.
The USD 15 billion Stand-By Arrangement
with the IMF went off track and lapsed in December 2012, as the authorities
made no progress on key programme conditions, including energy pricing reforms,
revision of some budget policies and provision of greater flexibility of the
hryvnia. Failure to unblock the IMF Stand By Arrangement has prevented the
disbursement of macro-financial assistance from the EU (total amount of EUR 610
million).
3.4.        Mediterranean partners
3.4.1.     Egypt
The uncertainties triggered by the January
2011 revolution, the ousting of President Morsi in July 2013 and the subsequent
riots and violence continue to affect the economic situation in Egypt, even
though the full impact of these events is not yet reflected in the available
data. Real GDP growth in 2011/12 fiscal year (FY) reached 2.2%, a slight
acceleration from 1.8% in FY 2010/11, and is estimated to be 2.0% in FY
2012/13. On the fiscal side, fiscal deficit stood at 10.8% of GDP in FY 2011/12
– up from 9.7% the year before. Although the budget for FY 2012/13 foresaw a
reduction of the deficit to 9.8% of GDP, the figure is estimated to have
increased to 12-13% of GDP on the back of increased subsidies and social
transfers, debt repayments and salary increases, based on May 2013 figures.
Inflation, which had remained subdued in 2012, picked up considerably in 2013,
reaching 10.3% in July. 
Reserves reached a low of USD 13 billion in
May 2013 (from a peak of USD 36 billion in December 2010), forcing the Central
Bank of Egypt to allow for a currency depreciation of 16% between December 2012
and August 2013. However, capital inflows estimated at USD 8 billion from Qatar
and Libya to the Morsi government, followed by combined pledges of USD 12
billion from Saudi Arabia, Kuwait and Unites Arab Emirates since July 2013,
have eased financing pressures on the government. As a result, external debt
increased significantly and, even though it represents a still relatively
modest 14.9% of GDP as of March 2013, it is expected to continue to rise. Debt
service represents a significant 26.3% of the total budget for FY 2012/13, and
includes a particularly costly domestic portion (average interest rate of
13.26% as of May 2013) with a short maturity profile. 
On the external side, the balance of
payments is foreseen to have improved in FY 2012/13 as a result of (i) a drop
of US 0.7 bn in the trade deficit and a rise of USD 1 bn in tourism revenues in
the first nine months of FY 2012/13 (ii) a continued strong inflow of
remittances, and (iii) a significant slowdown in portfolio investment outflows.
In the short-term however, the current account situation is expected to
deteriorate on the back of lower tourism revenues during the key summer and
autumn seasons 2013. The staff level agreement reached with the IMF in November
2012 to enter into a USD 4.8 billion Stand-By Arrangement was never finalised,
and recent developments suggest that it will not materialise in the short-term.
3.4.2.     Lebanon
The Lebanese economy continues to be
seriously affected by the conflict in Syria, in particular through disruptions
in trade of goods and services (e.g. tourism), but also real estate. Lebanon’s
real GDP growth fell from 7% in 2010 to 1.5% in 2011 and 2012. The expectations
of a mild recovery in 2013 (GDP growth forecast at 2%) may not be realised, in
view of the summer 2013 developments, which exacerbate the region’s volatility.
Consumer price inflation increased to 10.1% in 2012 (from 3.1% the year before)
mirroring continued high global food and fuel prices, but also partly
reflecting the revision of the CPI and the increased demand from Syria and the
Syrian refugee population. Inflation expectations for 2013 (2.8%) are also
likely to be revised upward. 
Lebanon's trade deficit, combined with a
negative net income due to low returns on foreign reserves and high external
debt payments, only partly mitigated by remittances, translated into a large
current account deficit in 2012 (16% of GDP). The central bank maintained large
foreign exchange reserves (USD 35.7 billion at end-2012) to protect financial
stability and give credibility to the currency peg against the US dollar. 
The Syrian refugee crisis is causing
serious strains on the Lebanese fiscal situation, which remains very
vulnerable. The central government deficit increased from 6.1% of GDP in 2011
to 9% of GDP in 2012. Fiscal reforms are however unlikely to take place due to
the volatile political situation both in the Cabinet and in the Parliament.
Gross public debt remains among the highest in the world at 139% of GDP in
2012. It is now foreseen to increase further to 141% of GDP in 2013, as the
downward trend of 2009-2011 was reversed with the outbreak of the Syrian
conflict.
Lebanon’s external debt remains among the
highest in the world at 175% of GDP in 2012. The spill-overs of the Syrian
conflict are negatively affecting the country, and the progressively declining
trend has been on the reverse since mid-2012. About 80% of the external debt
consists of short-term non-resident deposits in the banking sector. However,
these deposits are largely owned by the Lebanese diaspora and have demonstrated
highly resilient in crisis situations. Bank deposits continued to grow in 2012
and exceeded 300% of GDP by the end of 2012. No IMF arrangement was agreed with
Lebanon in 2012 and 2013.
3.4.3.     Morocco
The Moroccan economy slowed down markedly
in 2012, with GDP growth of 2.4% compared to 5% the year before, mainly as a
result of a poor harvest that dragged down agricultural performance. Growth is
expected to pick up to 3.5% in 2013 and further accelerate in 2014 as the
economic situation of Morocco's main trading partners gradually improves and
sound macroeconomic policies are pursued. As a result of a shortfall in
revenues and the significant cost of price subsidies, the government budget
posted a deficit of 7.5% in 2012, which is expected to decrease slightly in
2013. Inflation averaged 1.3% in 2012 and stood at 2.4% as of April 2013.
Expectations in the medium term are that it remains below 3% with occasional
spikes, as certain subsidies are gradually cut back due to their significant
fiscal cost. Monetary policy has been slightly expansionary (rates were last
cut in March 2012 to 3%), while remaining focused on controlling inflation. The
exchange rate continues to be tightly managed against a basket of
euro-dominated currencies, despite pressure from exporters to float the
exchange rate to improve the terms of trade. 
Morocco's current account deficit reached a
substantial 8.8% of GDP in 2012, but is expected to narrow to 6.3% in 2013
thanks to increased domestic production and fiscal consolidation. Apart from
weaker exports, the current account was affected by higher import prices of
energy and food commodities. The current account deficit was partly financed by
the resilient capital account surplus, including substantial FDI flows. 
Public debt continued its upward trend,
increasing from 64.8% of GDP in 2011 to 71.2% of GDP in 2012. The level of
total external debt increased slightly to 24.8% of GDP in 2012, and is expected
to increase to 26.1% in 2013 as Morocco tapped the international
USD-denominated bond market for the first time in December 2012 (for USD 1.5
billion) and again in May 2013 (USD 750 million). Gross foreign reserves fell
by 8% to EUR 13.6 billion by end 2012, although they are expected to increase
to EUR 14.3 billion by end 2013. In August 2012, Morocco entered into a 2-year
USD 6.3 billion financing arrangement with the IMF under the Precautionary and
Liquidity Line (PLL), which it seems so far unlikely to tap.
3.4.4.     Syria
The outlook of the economic and financial
situation of Syria is difficult to assess, given the significant disruption
caused by the on-going conflict and the scarcity of reliable figures. Still, it
is clear that growth has been significantly affected by a sharp slowdown in
trade, tourism and private investment, as well as the destruction of
infrastructure. Consumer prices increased by 41.2% year-on-year in the third
quarter of 2012, according to the Syrian Central Bureau of Statistics. This
rise mainly consisted of price increases in food, housing, utilities and fuel
due to a combination of sharp reductions in their supply and alleged printing
of money by the central bank to pay for state salaries. Taking into
consideration black market and official exchange rates, the Cato Institute’s
‘Troubled Currencies Project’ estimated that inflation had accelerated to more
than 225% by mid-July 2013, fuelled by the currency’s sharp depreciation. In
fact, the value of the Syrian pound (SYP) against the EUR more than halved between
January 2012 and September 2013 (one euro being exchanged for 149 SYP as of 10
September 2013, against about 65 SPY in early January 2012).
The 2013 budget foresaw a 4% nominal
increase in expenditures, while leaving out information on revenues. It is
clear that the main sources of revenues have been significantly affected by the
conflict, including oil exports (which constituted 25% of government revenue in
2010) and customs revenue on imports. The Economist Intelligence Unit (EIU)
estimates that the external debt stock in Syria was limited to 18.7% of GDP in
2012, but expects it to reach 26.9% of GDP by year-end 2013. The debt
service-to-exports ratio also remains low at an estimated 2%. Except for an EIB
loan on which Syria defaulted in response to the suspension of loan
disbursements by the EIB, the country allegedly continues to service its debt. 
Considering the sharp drop in export
revenue combined with an increase in import costs since June 2011, as well as
the absence of any major net capital inflows, foreign exchange reserves are
believed to have considerably dropped. The EIU estimated that official reserves
decreased to around USD 4.8 billion at the end of 2012 (from USD 19.8 billion
at the end of August 2012, the latest IMF data available), which would be
equivalent to 4.7 months of imports.
3.4.5.     Tunisia
Following the sharp economic contraction of
2011, Tunisia has embarked on a gradual recovery since the beginning of 2012,
broadly supported by the rebound in tourism and foreign investment and generous
public spending. Real GDP grew by 3.6% in 2012 after contracting by 1.9% in
2011 and inflation picked up to 5.9% by the end of the year (from 4.2% at
end-2011) on the back of stronger domestic demand and rising commodity prices.
Against this background, the central bank started tightening its monetary
stance in October 2012, through policy rate increases and tighter reserve
requirements for consumer credit. On the fiscal front, public finances came
under further strain as current expenditures (in particular subsidies and
wages) continued to rise, contributing to a 1.3% widening of the budget deficit
(to 4.5% of GDP) and to a further increase in the level of external debt (to
51.6% of GDP at end-2012 as compared to 47.8% at end-2011). On the external
side, the rebound in tourism revenues and remittances (+34% and +22%,
respectively, as compared to 2011) did not offset the increase in imports and
the slowdown in exports related to the Eurozone crisis. This resulted in a
deteriorated current account deficit, which increased to 8.1% of GDP in 2012
from 7.3% the year before. Net foreign direct investment rebounded to EUR 1.3
billion in 2012 from EUR 0.3 billion the previous year, allowing a partial
recovery of international reserves after their 20% drop in 2011. Reserves stood
at EUR 5.7 billion at end-August 2013 (representing around 3.8 months of next
year's imports). 
Amid prolonged political uncertainty,
Tunisia's long-term foreign currency rating was downgraded by all three main
agencies (Moody's in May 2013, Fitch in December 2013, and S&P three times
between May 2012 and August 2013). Against this background, Tunisia reached an
agreement with the IMF on a 24-month Stand-By Arrangement (SBA) in the amount
of USD 1.75 billion (400% of Tunisian quota), which was approved by the IMF
Board in June 2013. In early September 2013 the authorities requested
complementary macro-financial assistance from the EU.  
3.5.        Other countries
3.5.1.     Brazil
Following weaker-than-expected economic
growth in 2012 (+0.9% year-on-year), activity in Brazil has been picking up in
the first half of 2013: GDP grew by +0.6% quarter-on quarter in the first
quarter and by a three-year-high +1.5% quarter-on-quarter in the second
quarter. The rebound has been mainly supported by a strong investment
performance, with gross fixed capital formation expanding by +3.6%
quarter-on-quarter in the second quarter after a +4.6% increase in the first
quarter. Such momentum is however unlikely to be sustained in the second half
of the year, as business confidence indices have deteriorated. Moreover,
private consumption – Brazil's main growth driver – has been virtually flat in
the first half of the year (+0.1% quarter-on-quarter in the first quarter and
+0.3% in the second quarter), as a result of persistent inflation and tighter
credit conditions. Moreover, the strong depreciation of the Brazilian real
(-19% against the USD and the EUR between May and August 2013, -37% since July
2011) does not bode well for Brazil's net exports over the near term.
As inflation expectations continued to
drift away from the 4.5% annual target, the Central Bank of Brazil raised the
benchmark Selic rate to 9.0% in August - the fourth consecutive rate increase
this year. Inflationary pressures have been mounting since the beginning of
2011, affected by the mismatch between supply and demand, higher food prices
and internal factors such as increases in transport and education costs as well
as above-average growth in service prices. However, inflationary pressures have
seemed to ease down recently, with the 12-month consumer price inflation index
decreasing to 6.15% year-on-year in August (a five-month low) and thus
returning within the Central Bank's tolerance zone of 2.5% - 6.5%.
In the short term, weak growth is expected
to affect Brazil's fiscal balance through a higher fiscal deficit (fiscal
deficit was 2.8% in 2012), a lower primary surplus and difficulties in
achieving a decline in the government debt ratio of 59% of GDP. Nevertheless,
the economy's resilience to adverse shocks will remain warranted by a high
level of international reserves (18.6 months of imports, at end-2012), strong
capital ratios in the banking system, and limited exposure to
foreign-currency-denominated debt, which accounts for only 5% of total debt.
3.5.2.     South Africa
While the South African economy had showed
signs of recovery in 2010 and 2011 (+3.1% and +3.5% respectively), activity
expanded at the slower pace of 2.5% in 2012. Weak domestic conditions and
sluggish global demand resulted in the country continuing to grow well below
its potential output and the level that would be needed to address chronic
unemployment (25.6% in the second quarter of 2013). Despite the persistence of
low interest rates and sharp real wage growth, consumer spending is expected to
stagnate due to poor job creation and elevated debt levels. This, combined to
weak external demand and lower commodity prices, does not bode well for South
Africa's export performance and hints at economic growth further decelerating
in 2013. In the medium term, GDP growth should gradually pick up, supported by
robust investment spending and rising exports as global trade recovers.
Government policy should remain supportive through fiscal stimulus measures in
the run-up to the Presidential elections in 2014, in spite of the budget
deficit deterioration in 2012 (-4.6%). Additional electricity supply from new
power plants, upgrades in water supply and rail infrastructures as part of the
National Development Plan 2030, as well as strong regional growth should also
support the expansion of activity.
On the downside, the main risks perceived
to the growth outlook relate to the persistence of global economic fragility,
the weakness of the mining sector, the deterioration of the current account
deficit (6.3% in 2012), and rising inflationary pressures. With respect to the
latter, the year-on-year consumer price index (CPI) reached 6.3% in July 2013, straying outside of the
Reserve Bank's inflation target ceiling of 6% for the
first time since April 2012. The pick-up mainly stemmed from a 6.9% rise in
petrol prices, a 7.1% hike in the cost of electricity and other fuels, and a
9.4% increase in water service charges. A further key cause for rising CPI has
been the strong depreciation of the Rand – minus 20% year-on-year in July 2013
– which increased import costs, including for fuel. Pertaining to the fiscal
situation, South Africa's public debt burden continues to be manageable - net
public debt was estimated to represent 42.3% of GDP in 2012 - although it has
increased rapidly in the past few years.
3.5.3.     Tajikistan
Real GDP growth remained strong in 2012 at
7.5%, driven by an increase in industrial production and agriculture as well as
services. However, economic growth is likely to slow down somewhat in 2013. The
strong growth performance and improved revenue collection in 2012 resulted in a
small surplus of 0.7% of GDP in the government's fiscal balance. Public
external debt remains fairly modest at about 30% of GDP. Consumer price inflation
was at about 6.5 % at end-2012, about 3% less in 2010 and 2011, which reflects
the developments in global food and fuel prices. The current account balance
improved in 2012, recording a deficit of 1.3% of GDP. 
The structural weaknesses of the economy
have not changed, however. Tajikistan relies heavily on remittances and a
narrow exports base (aluminium, cotton and electricity) in its external current
account. A weaker economic outlook for Tajikistan's main economic partners
(Russia, China and Turkey) is likely to have an impact on export revenues in
2013. The national currency somoni has been stable since late 2011, supported
by remittances inflows and by central bank interventions. Tajikistan's economy
is highly vulnerable to shocks. International reserves of the central bank
remain low, covering 1.5 months of imports at year-end 2012. Tajikistan's
agreement with the IMF for an Extended Credit Facility (ECF) expired in May
2012. Discussions on a possible IMF-supported successor program are ongoing but
have not brought any concrete result so far.
The situation in the banking sector
continued to deteriorate during 2012 and remains a main concern. Direct state
lending and overall weak governance in the financial sector, including in the
central bank, have been long-standing issues which need to be addressed to
support savings and investment by the private sector. The resolution of the
Agro Invest Bank is an urgent priority for the government. Possible losses
originating in bank resolution and government management of State-Owned
Enterprises in general could burden the fiscal position, which had started to
improve as a result of tight fiscal policy in 2011 and 2012.
[1]               Within each portfolio individual EIB loans are, de
facto, guaranteed at 100% until the global ceiling is reached.
[2]               OJ L 308, 3.12.1999, p. 35.
[3]               OJ L 186, 15.7.2008, p. 30.
[4]               OJ L 280, 27.10.2011, p. 1.
[5]               For the purpose of this calculation, it is assumed
that defaulting loans are not accelerated, i.e. only due payments are taken
into account.
[6]               Based on the amounts due (capital and interest) under
operations disbursed at 31.12.2012.
[7]               Council Regulation (EC, Euratom) No 1150/2000 of 22
May 2000 (OJ L 130, 31.5.2000, p.1) implementing Council Decision 2007/436/EC,
Euratom of 7 June 2007 on the system of European Communities' own resources (OJ
L 163, 23.6.2007, p. 17).
[8]               The loans (and loans guarantees) to accession
countries were covered by the Guarantee Fund until the date of accession. From
that date, those that remained outstanding ceased to be external actions of the
Union and are therefore covered directly by the Budget.
[9]               Since the entry into force of Council Regulation (EC,
Euratom) No 480/2009 of 25 May 2009 establishing a Guarantee Fund for
external actions (codified version), the "Guarantee Fund Regulation"
(OJ L 145, 10.6.2009, p.10), the agreement between the EU and the EIB on the
management of the Fund foresees that the Commission must authorise the Bank to
withdraw the corresponding amounts from the Fund within three months from the
date the EIB calls in the guarantee.
[10]             If there are insufficient resources in the Fund, the
procedure for activating the guarantee is the same as for borrowing/lending
operations, see 0 above.
[11]             Central and Eastern European Countries.
[12]             New Independent States.
[13]             Mediterranean countries.