Weekly Export Risk Outlook

In the headlines:
- Egypt: The military unseats President Morsi
- US: Q1 GDP growth revised downwards
- Portugal: Rising political and financial uncertainties
- Eurozone: Company credit at its lowest level since 2008

Figure of the week: +1.8% - Latest estimate of q/q annualised US Q1 GDP growth

​Egypt: The military unseats President Morsi

On 3 July, President Mohamed Morsi, who was elected to office in polls deemed relatively free and fair, was relieved of his office by the military. On Monday, the army chief, General Abdel Fattah al-Sisi, had given the government 48 hours to resolve the political impasse behind the current campaign of social disturbances. Morsi remained unmoved and, on expiry of the ultimatum, the military took action. For now, the constitution is suspended and the Chief of Justice of the Supreme Constitutional Court has assumed power. The military pledges elections will be held as soon as possible. Morsi’s popularity rating had fallen sharply but it was the competing mass demonstrations of pro- and anti-regime protestors, accompanied by some violence, that led to the military intervention. Even if the political transition can be put back on track, the economy will continue to be adversely affected and an IMF facility is unlikely to be approved in the short term, exacerbating the deterioration. Do not expect a quick resolution of underlying problems, whoever leads the country.

US: Q1 GDP growth revised downwards

The third reading of the GDP data for Q1 showed economic growth was markedly slower than expected at +1.8% q/q annualized, after +2.4% in the previous estimate. In particular, consumption was revised down to +2.6% q/q annualised, from +3.4% Q2 also looks weak as consumption growth was below average in May and negative in April. Consumer confidence, although at a post-recession high, is low at an index of 81.4 in June, compared with a long-term average of 91.5. Additionally, the June ISM survey on manufacturing barely moved into positive territory, at 50.9. However, housing remains buoyant, with increases in home prices and sales. Meanwhile, after Bernanke’s surprising talk about the possibility of slowing QE, interest rates are up sharply and seven Fed officials gave speeches last week trying to clarify monetary policy, although with limited success.

Portugal: Rising political and financial uncertainties

Earlier this week, the finance and foreign ministers resigned as public support for austerity is fading. The country risks entering a period of political uncertainty as the ruling coalition is weakened and the prospect of early elections is rising. As a consequence, sovereign bond yields increased strongly on Wednesday (+110bps for the 10-yr bond yields to 7.6%, the highest since end-2012). This is worrying as a partial return to the markets is scheduled for autumn 2013. While the refinancing needs are almost covered for this year (remaining maturing debt is EUR7.9 billion), interest payments on the debt remain an issue (around EUR7.4 billion). A return to the markets is important so that the country will be able to benefit from the ECB’s bond-buying plan (Outright Monetary Transactions). However, risks remain skewed on the downside and the stabilisation of public debt (above 120% of GDP) remains an issue, given the elevated primary deficit (-2% of GDP at end-2012). Possible solutions to the debt crisis include direct Portuguese bond purchases on the primary market by the ESM, a new bailout programme/extension of the current one or a debt restructuring (ESM/ERF).

Eurozone: Company credit at its lowest level since 2008

The fall in credit to non-financial corporates accelerated in May (-5% y/y) and, with the exception of the Netherlands (+3.6% y/y) and Belgium (+1% y/y), the contraction was widespread, although more pronounced in southern Europe. Contraction was particularly evident in Spain (-19.9% y/y), Ireland (-6.2% y/y), Portugal (-6.0% y/y), Greece (-7.6% y/y) and Italy (-4.6% y/y). However, credit contraction also accelerated in the core countries, including Germany (-0.9% y/y) and France (-0.5% y/y). There are two underlying causes: firstly, a rise in non-performing loans and weak profitability of banks is curbing the supply of credit and, secondly, weakened demand and a gloomy business climate weigh on companies' investment intentions and therefore on credit demand. This is all the more worrying since the investment cycle is primarily financed via bank credit (accounting for more than 90% of total financing for companies, compared with 30% in the US).