Feb MarketMonitor

marketmonitor
adapting to the challenging
economic environment

February 2009

The immediate outlook for key markets and sectors

Every month, Atradius brings you an up to the minute snapshot report on a range of export markets
and key trade sectors. Our underwriters have a specialist view of the world economy – and the
industries that make that economy tick - that you won’t find in the general press coverage of events,
so we hope that you will find our summary reviews a useful addition to your Atradius credit
insurance.

Even more importantly, our underwriters use their expertise and experience to look to the future. In
each edition of Atradius Market monitor you’ll find our outlook for a number of key market
economies.

In this issue…

…we feature the following markets:

The Netherlands – with a spotlight on construction and transport industry sectors
Spain – with a spotlight on construction and automotive industry sectors
United States of America
Belgium
Austria
Ireland
Poland
Indonesia

1

Expected default in Western Europe and USA

One of the most important factors that any business needs to know is the trend of insolvencies in their
markets.

The following Expected Default Frequency (EDF) chart is based on listed companies in the markets referred
to, and the likelihood of default across all sectors within the next year. In this context, default is defined as a
failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is
calculated from three factors: market value of a company’s assets, its volatility and its current capital
structure. As a guide, the probability of one firm in a hundred defaulting on payment is shown as 1%

Source: Atradius Economic Research and KMV Credit Monitor

The deteriorating global economic environment translates into an increase in insolvencies. As confirmed by
the EDF indicators, insolvencies are predicted to increase steeply across all major economies in 2009. The
heightened default expectation has been evident since mid-2007 (see chart above). In December 2008, the
median EDF of all major Western economies rose again compared to the previous month, with sharp
increases recorded for France, Italy, the UK and the US. This development suggests an accelerating default
risk for all major Western economies.

On the following pages, we assess the impact of expected default in key
markets

2

The Netherlands

The current business environment

With its open economy, the Netherlands is severely affected by the global economic downturn – exports
accounting for 32% of total Dutch GDP. According to CPB, the Netherlands Bureau for Economic Policy
Analysis, it is generally the case that a decline in the world economy of 1% will lead to a 0.3% drop in Dutch
economic growth.

Overall, a contraction of the Dutch economy by 2% is forecast for 2009. In November 2008 the export of
goods dropped by 5% year-on-year – the largest fall for 7 years. Production has decreased to the lowest
level for 25 years with a capacity usage close to 77%, compared to the norm of around 85%. Not surprisingly,
both consumer and producer confidence is at an all time low. However private consumption will probably
remain stable in 2009, as net incomes rise due to tax adjustments and a reduction in the cost of energy.
Unemployment will increase, but the major impact is not expected until 2010 as existing vacancies will be
absorbed in the short term, or shift from the private to the public sector (e.g. health care and education).

Property developers seeking finance for projects and companies with a need for additional working capital
are both faced with a banking sector that is increasingly restrictive in its attitude to lending and credit terms –
despite the government’s supported guarantee system.

The outlook for the Netherlands

The credit crunch has forced companies to focus on reducing the need for working capital by keeping lower
stocks and accumulating cash, while seeking longer terms from their suppliers. Companies that aren’t
successful in doing this will face a liquidity deficit on the short run and possible failure in the longer term.

The level of insolvency is expected to rise sharply in 2009. Since October 2008 the Central Bureau of
Statistics has reported a steep rise of insolvencies: in November alone, limited liability company insolvencies
rose 38% year on year. This situation and outlook is reflected in the Expected Default Frequency (EDF)
indicator. From January to December 2008 the EDF for the Netherlands rose by 665 basis points.

3

Spotlight on industries in The Netherlands

Construction

How has the global economic downturn impacted the construction industry?
Construction generates 4 % of GDP and has performed well over the past 3 years, despite the impact of
huge price increases for raw materials. Although prices fell in 2008, they do not compensate for the drop in
demand resulting from the credit crisis.. The demand for new houses has effectively collapsed since summer
2008, negatively impacting both developers and manufacturers.

What is the current trend in payment delays, payment defaults and insolvencies and why?
In the first half of 2008 the number of defaults in the construction sector showed signs of improvement. But
then the tide reversed, leading to a 70% increase of insolvencies year-on-year in November. A further rise is
predicted - and the current number of payment defaults supports this prediction. The construction sector is
facing a liquidity squeeze, due to falling demand and the unwillingness of banks to finance the additional
working capital needed, affecting both suppliers and subcontractors.

What should companies selling products into the construction sector pay particular attention to?
Ensure that a construction company is building on behalf of third parties and not for its own account, as the
latter would generally mean an increased finance risk.
And, of course, stick to the contractual terms of payment; don’t permit extensions and don’t agree further
shipments while earlier ones remain unpaid.

What is Atradius’ short term (6 month) outlook for the construction industry?
In 2009, once construction companies have completed current and agreed projects, the overcapacity and
lack of new orders in the industry will become evident. The summer will be the crunch time: if, by then, the
economic situation hasn’t improved and government support hasn’t been announced, we expect a
substantial increase in insolvencies in the second half of the year.

4

Spotlight on industries in The Netherlands

Transport

How has the global economic downturn impacted the transport industry?
Transport is a major contributor to the Dutch economy, both domestically and to established export markets
like Germany and other European neighbours. During the first half of 2008 the sector was hit by the
enormous increase fuel price, and any contracts that did not factor in a fuel price clause were destined to be
loss-making. Since summer 2008 the fuel prices has come down, but this has been accompanied by a
continuing sharp fall in demand, which has led to a gloomy short-term forecast.

The developments described above have resulted in a sharp increase in insolvencies. The latest figures for
November 2008 show a 100% increase of insolvencies year-on-year.

What should companies selling products into the transport sector pay particular attention to?
Agree on short terms of payment and enforce them. Don’t allow extensions or further deliveries while
existing invoices remain unpaid.

What is Atradius’ short term (6 month) outlook for the transport industry?
Our expectations are that the internationally-active transport groups will survive if their financing was sound
before the crisis began. The middle-sized companies will probably absorb the decline in income unless they
operate in sectors that are the worst impacted, such as automotive, electronics, paper and packaging
material. Small companies are expected to go out of business, unless they have no need for additional
capital or are operating in the agricultural and food distribution industries. A further increase in insolvencies
is highly likely.

5

Spain


The Spanish economy deteriorated much faster than many of its European neighbours during 2008. After a
3.8% growth in 2007 Spanish GDP increased by only 1.1% in 2008. After a contraction of 0.2% in Q3 of
2008, GDP fell by 1.1% in the last quarter - the fastest rate of contraction since 1960.

The global credit squeeze has hit the housing market and construction sectors especially hard. The
homebuilding sector – one of the main pillars of the economy - has been negatively affected by high interest
rates, continuing high real estate prices and a large stock of houses.

Since the end of Q3 of 2008 the crisis has also spread rapidly into other sectors. While overall industry sales
decreased by 2.1% and order volumes fell by 1.2% between January and November 2008, in November
2008 sales plummeted by 20% and orders by 30%. The deterioration has manifested itself in almost all
industries, but so far construction-related industries, automotive and durable consumer goods have been the
worst affected. Retail business shrank by 5.6% in 2008.

Compared to 2007, payment default rose by 170% in 2008. In the same period the number of companies
filing for insolvency almost trebled: from 1,039 to 2,963 on preliminary figures.

The outlook for Spain

2009 will be Spain’s worst recessionary year. Currently GDP is forecast to contract by between 1.6% and 2%,
and we expect a further rise in payment defaults and insolvencies. This increase will in turn lead to delays in
insolvency proceedings, jeopardizing the chances of recovery.

Hardly any sector will escape this crisis year unscathed. We expect construction-related industries,
automotive and capital goods to be among the worst affected, the latter suffering from an expected decrease
in investment of 9.3% in 2009. We also expect a further deterioration in the retail sector, due to the expected
contraction in consumer spending, caused by sharply increasing unemployment.

6

Spotlight on industries in Spain

Construction

How has the global economic downturn impacted the industry?
In 2008 demand for homebuilding dropped sharply as a result of high interest rates, increasing
unemployment and uncertainty about future price developments. At the same time real estate prices in 2008
remained high. New public works projects also fell by 20%. In view of the high borrowing of many companies
in the sector, the poor outlook for the industry and the fear of asset devaluation, banks have tightened the
volumes and conditions of both corporate and consumer lending.

The crisis in the construction industry has led to a very strong increase in payment defaults and insolvency.
While the number of insolvency procedures increased by more than 300% in 2008, 36% of all those cases
related to the construction industry, and also affected major stock-quoted companies.

What should companies selling products into the construction industry pay particular attention to?
Companies selling into the construction industry should pay particular attention to the degree of
diversification of their buyers, and to the market segment where the buyers are operating. We consider
companies acting predominantly in the public works sector to be less vulnerable, as these enterprises will
benefit from measures being taken by the government during 2009 and should also be less affected by asset
devaluation.

Many companies in the sector show a high gearing and also have assets which are currently suffering
devaluation. Together with the current market situation and outlook, this will deter bank lending. Of course,
vendors should be alert to any increase in payment delays.

What is Atradius’ short term (6 month) outlook for the construction industry?
The outlook for the whole industry remains negative, especially for the homebuilding sub-sector. There is still
a high stock of houses, while demand remains very low. We expect a further increase in insolvencies this
year.

7

Spotlight on industries in Spain

Automotive
How has the global economic downturn impacted the industry?
The Spanish automotive industry is very export-dependent - exports account for 80% of sales. As a result it
has been significantly hit by the global crisis since mid 2008. During 2008 car production in Spain fell by 12%,
while car sales dropped by 28%. The sharp decrease in car sales accelerated in January 2009, with a 41%
reduction compared to previous year. Over recent months many car plants and automotive suppliers have
put in place restructuring measures.

The current situation puts heavy pressure on the automotive supply industry, where we have seen an
increase in payment defaults over recent months. In 2008, insolvencies increased by 79% compared to 2007.

What should companies selling products into the industry pay particular attention to?
The downturn in the industry is fast and severe, so financial deterioration can be very rapid. Therefore,
vendors need to pay close attention to any changes in the payment behaviour of their buyers.

What is Atradius’ short term (6 month) outlook for the automotive industry?
The Spanish automotive industry is expecting a historically bad year. Car production is likely to shrink by
21% - to levels not seen since 1989. We expect a strong increase in payment defaults and insolvencies.

8

United States of America


The US economy has entered a dangerous transitionary period, as the financial system and consumers alike
continue to reel from the aftershocks of the last summer’s collapse of Lehman Brothers and the bail-out of
major financial players. While the Federal Government continues to inject liquidity into the credit markets,
looks at yet another bail-out of the banking system and debates a stimulus package for the US economy,
most major economic measures are flashing red.

Real GDP-growth fell by 3.8% in Q4 2008 following a 0.3% decline in Q3. Consumer demand, which drives
over two-thirds of the US economy, and business investment both collapsed - not surprising when
unemployment statistics to the end of January 2009 indicate the worst three month period of job losses since
1945, with companies ruthlessly controlling costs. Residential housing prices in most major cities have been
falling since July 2006: a pattern not seen since the Great Depression. Rounding off the litany of bad news,
US Banks continue to tighten lending credit available to business and consumers.

The outlook for the USA
The impact on business is evident in the accelerating pace of corporate defaults and insolvencies. January’s
speculative grade defaults reached 5 times the level of that at the end of 2007, and the expectation is that
2009 default rates will steeply rise. This trend is confirmed by the sharp increase in the Expected Default
Frequency (see chart above). Particularly vulnerable are companies in highly cyclical sectors, like chemicals,
those suffering from sharp drops in demand, like automotive and retailers, and leveraged businesses across
all sectors, reflecting the continued tightening in credit availability.

It is increasingly likely that, despite aggressive government action to fix the banking system and stimulate the
economy, the road to recovery will extend well into 2010. With credit markets virtually frozen and the ratio of
private sector debt to GDP reaching 300% in 2008, a substantial unwinding is required. We are already
seeing an increase in consumer saving, and, while this bodes well for the future, it will hit an already
struggling retail sector. Unfortunately the housing market appears some way from hitting bottom, with
substantial unsold inventory in most markets, and, in view of rising unemployment rates, it is difficult to see a
housing recovery in the short term.

9

Belgium


The Belgian business environment deteriorated in the second half of 2008, and early indicators for 2009
unfortunately signal the continuation of this negative trend. Belgium will technically enter into recession in Q1
of 2009, and for this year a negative growth of -1.7% is expected.

Exports, as a main contributor to GDP, have been severely affected. The credit crisis has put the banking
system under pressure with a direct effect on the issue or renewal of credits for both corporates and
consumers, which in turn has negatively affected investments. Corporate investment showed a positive
development in 2008 (+6,8%) but is expected to be negative (- 4%) in 2009.

The dramatic deterioration has had an immediate impact on companies’ payment behaviour. In the second
quarter of 2008, 68.36% of the invoices issued by Belgian companies were paid on time, but the third quarter
showed a steep deterioration with a drop of more than 4% to 64.13%. 9% of these invoices were paid more
than 90 days after due date: an increase of about 16% compared to the previous quarter. First indications for
2009 confirm that this trend will continue.

The number of insolvencies reached an all time record of 8.512 cases in 2008, an increase of 10.8%
compared to 2007. A dramatic deterioration in the second half of the year led to consecutive monthly all time
records, with services (restaurants and cafés), construction, consumer durables, transport, retail and textiles
particularly impacted. Of these, construction and automotive have suffered from a fall in investment, while
services, consumer durables, retail and textiles have seen a marked decrease in domestic consumption.

The outlook for Belgium

Contracting GDP-growth and diminishing access to credit have led to lower investments and consumption
and pressure on export books. The main indicators are negative and we do not expect any recovery in the
short term. The number of insolvencies is expected to increase by more than 10% in 2009. This worrying
development is already signalled by the January figures, with 781 insolvencies, an increase of 14.52%
compared to January 2008. Construction, metals, automotive, transport and the retail sector will continue to
suffer.

10

Austria


The global economic slump is increasingly affecting Austria. In Q4 of 2008 GDP-growth shrank by 0.4%
quarter-on-quarter, and in Q1 of 2009 a further decrease of 0.5% is expected. Overall a GDP-contraction of
at least 1.3% is expected in 2009. As the Austrian economy is very export-dependent, shrinking orders from
abroad have already negatively affected Austrian export-driven industries.

Like other economies, Austria is suffering tighter credit conditions, aggravated by the fact that many Austrian
banks are active in neighbouring Central and Eastern Europe. As a result, the worsening economic situation
and increasing corporate and private insolvencies in this region, which have already led to rising credit
defaults, are proving an additional burden for the Austrian bank system.

The Austrian corporate structure is characterised by a majority of small and medium-sized enterprises
(SMEs) which, in general, are more vulnerable than larger companies due to their lower equity base and
cash flow. That said, Austrian SMEs are not as exposed to international trading risks, such as currency
volatility or depreciation of securities.

The outlook for Austria

In 2009 we expect an increase of corporate insolvencies by 8%-12%, caused mainly by higher financing
costs to compensate for shrinking profits.

The following sectors are mainly affected:
Textiles: this sector has struggled for a long time, with competition from Asia, the high price of raw materials
and high wages). This will be aggravated by the current crisis.
Construction: this sector has headed the insolvency statistics for many years. Having already decreased in
2008, orders will shrink massively in 2009.
Transport: falling demand has led to increasing pressure on prices and margins, mainly affecting companies
providing basic services, as in this segment competition is price-driven. Companies in this sector are already
battling lower labour costs in Eastern European competitors, and we expect further insolvencies in the short-
term.
Automotive: automotive suppliers are highly dependent on developments abroad – especially in Germany,
where the automotive sector has been severely hit by the crisis. Production has been cut and short-time
working introduced. Low demand and cancellation of orders have led to a strain on finances, with banks and
investors increasingly reluctant to finance the liquidity gaps. Despite support measures introduced by the
government, insolvencies will increase sharply in the coming months.

11

Ireland


The Irish economy entered recession in 2008 for the first time in 25 years. During the 5 to 7 years up to
2008 the Irish domestic economy moved to a near dependence on construction - in particular house building
- to sustain itself. The downturn in house building from 77,000 units in 2007 to 51,000 in 2008 will continue
into 2009 where it is expected that units completed will fall to 25,000. This fall in house building will reduce
GDP growth by 3% in 2009.

We have seen large players in the construction sector defaulting, and the level of debt which many of
the ’super builders‘ have incurred in building up land banks is of major concern. Now that construction has
slowed, these companies are facing ever increasing interest bills, accruing against lower than budgeted
sales. We anticipate that substantially more of these companies will get into difficulties during the year. An
additional problem facing the developers is that the Irish banks are coming under pressure from investors
and regulators to accurately forecast bad debt and loan impairments, and this will result in further defaults.

Manufacturing has suffered badly in the early weeks of 2009, as has the motor trade, with new car
registrations down 66% during the first 20 days of 2009. Sales have been affected by the scarce availability
of credit and consumer fears over taking on extra commitment as we enter a year of uncertainty.

In 2008 insolvencies rose to 730 - up 103% on 2007 – and in January 2009 alone we have seen 73
insolvency notices (excluding Examinerships and Receiverships).

The outlook for Ireland

GDP is expected to contract by 4% in 2009. We expect to see continuing difficulties in construction in Q1
2009. Problems in construction will move into the steel/metals sector, which will suffer as commodity prices
fall with dangers of companies being over stocked with wrongly priced product. While it is too early to make
annual forecasts it is safe to assume that insolvencies will rise by at least 50%.

12

Poland


After GDP-growth of 4.8% in 2008, forecasts for 2009 now range from zero growth to 1.7%. During recent
years, Polish growth has been driven by both domestic consumption and exports. But exports have started
to fall rapidly due to the downturn in demand from EU countries, Poland’s main export destination. Domestic
consumption remains strong for the time being, but the first signs of a slowdown are visible.

As a consequence, heavily export-oriented companies in the automotive, machines, chemicals, construction
materials and furniture sectors are experiencing the biggest problems. Metals/steels may also come under
extreme pressure this year, due to falling demand, high stock levels from the second and third quarter of
2008, and a big drop in prices (by 30%).

We are seeing a tightening of credit conditions by banks, especially by international banks which are
themselves in trouble. As a result, it is extremely difficult for Polish companies to get new financing and many
are now facing a credit shortage and/or stricter credit terms. Additionally, many companies have debts in
foreign currencies, and face higher credit risks due to the sharp depreciation of the zloty, adding to their debt
burden.

The outlook for Poland

In 2008, the number of corporate bankruptcies actually fell by 8% to 411, but this year we will see an
increase as reflected in the Expected Default Frequency (EDF) indicator. From January to December 2008
the EDF for Poland rose sharply by 188 basis points. In January 2009 alone four companies listed at the
Warsaw Stock Exchange have filed for an out-of-court agreement with their creditors. Since the beginning of
2009 we have seen alarming reports about steep increases of payment delays.

We expect that companies that do not react quickly to the changing environment by reducing fixed costs, re-
directing export, reducing stocks and lowering or restructuring indebtedness will face liquidity problems.

But there are also some opportunities in the current environment: Large EU funds are earmarked for
infrastructure improvements, providing good prospects for the construction sector. Additionally Poland
remains a competitive and attractive destination, with low labour costs, for Western European businesses
looking to outsource.

13

Indonesia


Indonesia is expected to be one of the best performing Asian economies in 2009, as private consumption
and investment continue to expand - albeit more modestly than in recent years. That said, the 2009 growth
forecast has recently been revised by Business Monitor International from 5.0% to 3.6%. This downward
revision reflects the deterioration in global economic conditions, with demand from key export markets
already showing signs of contraction.

Indonesia's exports are already beginning to slow under the impact of falling commodities prices and slowing
1010global demand, after rising by around one-fifth last year. In particular, non-oil and gas exports to two of
Indonesia's largest trading partners - the US and Japan - declined significantly. The stock market in Jakarta
collapsed in October 2008 and companies are now finding it difficult to raise new capital due to the lack of
liquidity in the market.

The Bank of Indonesia has recently slashed its official lending rate from 8.75% to 8.25% to support both the
domestic economy and the export sector as global conditions continue to deteriorate. The sectors currently
in the spotlight are mining - due to commodity prices drop - steel, and the industries most affected by weaker
exports: textile, manufacturing and rubber.

The outlook for Indonesia

We expect exports to remain weak in the coming months in line with our bleak forecast for the global
economy. While Indonesia's economy is less dependent on external demand than many others, the knock-
on effects of the global economic slowdown will nonetheless inevitably take its toll on the country. Added to
this, corruption, excessive bureaucracy, poor infrastructure, protectionism and potential security risks also
threaten to undermine business stability. Businesses trading with their Indonesian partners should stay alert
for signs of default: delayed payments, requests for referrals, and non-acceptance of goods.

Atradius Copyright. While we have made every attempt to ensure that
the information contained in this report has been obtained from reliable
sources, Atradius is not responsible for any errors or omissions, or for
the results obtained from the use of this information. All information in
this document is provided ’as is’, with no guarantee of completeness,
accuracy, timeliness or of the results obtained from the use of this
information, and without warranty of any kind, express or implied. In no
event will Atradius, its related partnerships or corporations, or the
partners, agents or employees thereof be liable to you or anyone else
for any decision made or action taken in reliance on the information in
this report or for any consequential, special or similar damages, even if
advised of the possibility of such damages.

14

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