MOODYS.COM

21 JULY 2016

NEWS & ANALYSIS Corporates 2 » Astaldi's Turkish Projects Face Increasing Risks, a

Credit Negative » KION's Capital Increase Is Credit Positive » Joy City's Proposed Stake Sale in Subsidiaries Is Credit Positive

for COFCO HK

Infrastructure 6 » Great River Energy Plans to Retire Stanton Station Coal Plant, a

Credit Positive

Banks 7 » Cypriot Banks Benefit from Strong Tourism in 2016 » Omani Banks' Credit Growth Materially Outpaces Deposit

Growth, a Credit Negative

Sovereigns 10 » Uruguay's New Pulp Mill Project Is Credit Positive » Failed Coup in Turkey Exacerbates Challenges for Growth,

Financing and Reform » Azerbaijan's Recession Deepens with Oil Price Decline and

Currency Devaluation, a Credit Negative » South Sudan Turmoil Is Credit Negative for Uganda

US Public Finance 17 » Alaska Adjourns Legislative Session without Fiscal Overhaul, a

Credit Negative

RECENTLY IN CREDIT OUTLOOK

Articles in Last Monday’s Credit Outlook 19

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Corporates

Astaldi’s Turkish Projects Face Increasing Risks, a Credit Negative The attempted coup last Friday in Turkey is credit negative for Astaldi S.p.A. (B2 negative) because it might delay or freeze the company’s construction projects in the country and could result in a partial or entire suspension of the guaranteed return mechanisms of its concession assets. Additionally, it risks reducing the size and delaying the timing of Astaldi’s planned disposals of Turkish concessions.

Astaldi’s Turkish concessions form a substantial part of the company’s €750 million asset disposal programme that is part of a 2016-20 strategic plan that the company announced on 10 May. In the aftermath of the attempted coup, investors might be less willing to do business in Turkey and the planned asset sales may be harder to complete. Astaldi’s successful realization of its strategic plan, including the sale of the Turkish concessions, is vital to its deleveraging from 8.0x gross financial debt/EBITDA as of December 2015. Astaldi’s ongoing high financial leverage prompted us on 11 May to downgrade Astaldi’s issuer ratings to B2 from B1 and maintain its negative outlook.

Astaldi has material operations in Turkey, with around a €1.0 billion order backlog, accounting for approximately 12% of its total construction order backlog in execution as of December 2015 (see Exhibit 1). Main projects include the Etlik Integrated Health Campus in Ankara (€406 million backlog as per March 2016), the Gebze-Izmir Motorway (€398 million) and the Third Bridge on the Bosphorus (€170 million). We understand that construction is proceeding as scheduled for now.

EXHIBIT 1

Astaldi’s Construction Order Backlog by Country as of December 2015

Source: Astaldi’s annual report 2015

Astaldi also owns sizable stakes in the related concession assets of the three projects, totalling approximately €700 million as of December 2015, or approximately 60% of Astaldi’s total concession assets. We understand that the concession contracts include guaranteed return mechanisms, effectively eliminating traffic volume and pricing risks. At the same time, the realization of the guaranteed returns that are due from the government will be subject to sovereign risks, which we must reassess as part of our review process.

Although the sale of the Turkish assets is rather back-end loaded within the €750 million asset disposal programme (see Exhibit 2), the uncertainties in Turkey threaten to further delay the disposal plan and negatively affect its size.

Poland8%

Algeria3%

Venezuela14%

Turkey12%

Chile6%

Romania2%Peru

1%

Russia7%

Canada5%Indonesia

1%

Italy41%

Matthias Heck, CFA Vice President - Senior Analyst +49.69.70730.720 matthias.heck@moodys.com

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 21 JULY 2016

EXHIBIT 2

Astaldi’s €750 Million Asset Disposal Programme

Source: Company data

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NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 21 JULY 2016

KION’s Capital Increase Is Credit Positive On 18 July, KION Group AG (Ba1 review for a downgrade), a German manufacturer of forklift trucks and other material handling equipment, issued 9,890,000 new shares at €46.44 each, increasing its share capital by 10%. The transaction is credit positive for KION, which will use the issuance gross proceeds of around €460 million to decrease the debt portion of its funding mix for the acquisition of DH Services Luxembourg S.a.r.l. (Dematic, B2 positive), which KION announced in June 2016. We had already factored KION’s use of this capital to partly finance the acquisition into its rating and the review process we initiated last month.

KION’s main shareholder, Chinese engineering group Weichai Power (unrated), received 60% of the new shares, increasing its stake in the company to 40.2%. The remaining shares were placed with institutional investors. The new shares will be entitled to dividend payouts from the 2016 fiscal year.

KION expects the Dematic purchase price for the shares to total approximately $2.1 billion, based on an enterprise value of $3.25 billion, financed with a combination of debt and equity. The acquisition, which is still subject to regulatory approval and which the companies expect to close in the fourth quarter, is initially funded by a €3.0 billion committed bridge loan facility from a group of KION’s core relationship banks. Proceeds from this equity issuance and the issuance of new long-term debt and bank loans will refinance the bridge loan.

In addition, KION said that it would ask for shareholder approval to create an additional authorized capital raise of up to 10% that could also be used toward the Dematic acquisition. Doing so would further decrease the debt portion in the acquisition funding mix and takes into account KION’s stated financial policy to maintain a strong Ba rating with reliable access to the debt capital markets.

Luxembourg-based Dematic is a leading provider of logistics and material handling solutions with a strong focus on food, general merchandise and retail apparel. For 2015, Dematic generated revenues of $1.8 billion. KION and Dematic’s combined pro forma revenue for 2015 was more than €6.7 billion.

Martin Fujerik Assistant Vice President – Analyst +49.69.70730.909 martin.fujerik@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Joy City’s Proposed Stake Sale in Subsidiaries Is Credit Positive for COFCO HK On Monday, Joy City Property Limited (unrated), a key subsidiary of COFCO (Hong Kong) Limited (COFCO HK, A3 negative), began a 20-day open tender process to dispose of a 49% stake in subsidiaries Fortune Set Limited, Sunny Ease Limited and Vivid Star Limited for at least RMB9.29 billion ($1.4 billion). The proposed stake sale is credit positive for Joy City parent COFCO HK because the sale proceeds will support COFCO HK’s debt and leverage reduction.

Joy City plans to retain a 51% interest in the subsidiaries and will continue to manage the property projects through operational arrangements. We expect these subsidiaries to continue to be consolidated on COFCO HK’s balance sheet. Joy City is COFCO HK’s main vehicle for property investment and development. Joy City accounted for around 27% of COFCO HK’s adjusted EBITDA and about 37% of adjusted debt as of year-end 2015.

We expect that Joy City will use proceeds from the disposal – around 32% of Joy City’s adjusted debt and 12% of COFCO HK’s adjusted debt at year-end 2015 – to repay existing debt and/or support the development of its commercial property business. Doing so will reduce COFCO HK’s consolidated leverage, given that Joy City would otherwise have to use debt to fund its commercial property development if its internal cash resources are insufficient.

Assuming the disposal proceeds go toward reducing Joy City’s debt and other factors remain constant, we estimate that COFCO HK’s consolidated leverage would improve, with its adjusted debt/capital ratio dropping to 36% from 39% at year-end 2015, and net debt/EBITDA on consolidated basis declining to around 6.1x from around 7.5x over the same period.

However, the disposal will not immediately affect COFCO HK’s A3 issuer rating or negative rating outlook. COFCO HK’s leverage ratio was high for its rating at year-end 2015. The proposed disposal will allow COFCO HK to achieve leverage that is more appropriate for its rating. We expect a turnaround at its commodity trading and processing businesses at COFCO Agri (unrated) and Nidera (unrated), and stronger performance at its property segment in 2016, which would gradually reduce its leverage ratio to below 6.5x by year-end 2017.

COFCO HK’s negative rating outlook reflects the company’s execution risks in improving its profitability and cash flows against the backdrop of volatile commodity markets and the ongoing challenges in integrating COFCO Agri and Nidera. The outlook also reflects the negative outlook on China’s (Aa3 negative) sovereign rating, and the likely weakening of government support for state-owned enterprises as China’s reform process continues. COFCO HK’s move to sell down its property business is in line with the Chinese government’s efforts to reform and boost the efficiency of state-owned enterprises and simultaneously allow the government to maintain strong control in strategic areas.

COFCO Corporation (unrated), the ultimate parent of COFCO HK and Joy City, was designated as a pilot for state-owned investment companies two years ago. The asset disposal will allow COFCO Corporation to strengthen its focus on its core agriculture and food businesses, which have higher strategic importance to the country than the property business.

Kai Hu, CFA FRM Senior Vice President +86.212.057.4012 kai.hu@moodys.com

Tina Xu Associate Analyst +852.3758.1431 tina.xu@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Infrastructure

Great River Energy Plans to Retire Stanton Station Coal Plant, a Credit Positive Last Friday, Great River Energy (GRE, Baa1 stable) announced plans to retire its 189-megawatt coal-fired Stanton Station power plant by May 2017, citing current low power prices in its Midcontinent Independent System Operator region owing to low natural gas prices that make the Stanton Station uneconomic to operate. The plans to retire this 50-year old plant are credit positive because GRE indicates that these steps will likely produce annual net cost savings of $20-$30 million. The move will also improve GRE’s competitive position by facilitating an approximate 1.5 mills per kilowatt hour, or 2%, decrease in the members’ average wholesale power rate beginning in May 2017. Additionally, it will help meet environmental regulations in the future by reducing GRE’s owned exposure to carbon-emitting resources by about 7%.

GRE owns about 2,800 megawatts of generating capacity, including coal, natural gas and biomass sources, and has contracts to purchase just over an additional 900 megawatts of electric capacity, including approximately 468 megawatts of wind-powered generation, 200 megawatts from Manitoba Hydro and 83 megawatts from the Western Area Power Authority. GRE’s electric generating profile is heavily weighted toward coal, which in recent years has been supplying just over 70% of its energy requirements, the substantial majority of which has been generated at its critical 1,100-megawatt base-load facility, Coal Creek Station, in Bismarck, North Dakota. Because GRE’s capacity profile includes a sizable excess when compared with its peak load of just over 2,500 megawatts in 2015, the retirement of the Stanton Station capacity does not need to be entirely replaced, thus reducing the excess capacity position.

GRE’s average wholesale member rate was 71.9 mills per kilowatt hour in 2015 and we expect that the cooperative will need to implement modest wholesale power rate increases on an annual basis to sustain its financial performance at levels consistent with recent levels. That said, a portion of that upward rate pressure should be alleviated through net cost savings from Stanton Station’s retirement.

Great River Energy is a not-for-profit electric generation and transmission cooperative based in Maple Grove, Minnesota. Among the largest electric generation and transmission cooperatives in the US, it has 28 distribution cooperative members (owners) and its operations serve approximately 1.7 million people in Minnesota and Wisconsin.

Kevin Rose Vice President - Senior Analyst +1.212.553.0389 kevin.rose@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Banks

Cypriot Banks Benefit from Strong Tourism in 2016 Last Friday, the Cyprus Statistical Service (CSS) released data showing that revenues from tourism in the first four months of 2016 rose 12% from a year earlier, following 1% growth over the same period in 2015. The growth in tourism revenues suggests further improvement in Cypriot banks’ asset quality, a credit positive even though asset quality metrics will remain weak for a prolonged period given banks’ high stock of problem loans.

The industry’s growth is providing banks with new lending and asset sale opportunities, as was the case with Bank of Cyprus Public Company Ltd.’s (Caa3/(P)Caa3 positive, caa31) sale of Kermia Hotels Ltd. and adjacent land on 4 July 2016, which improved the bank’s 31 March 2016 common equity Tier 1 (CET1) ratio by 10 basis points. The CSS estimated tourism revenue for January-April 2016 was at its highest in more than a decade (see Exhibit 1).

EXHIBIT 1

Cyprus’ Tourism Revenue for January-April 2016

Source: Cyprus Statistical Service

Tourism receipts have grown with this year’s record total tourist arrivals, which surged 21% in the first half, up from a 9% increase for 2015 to 2.7 million tourist arrivals (see Exhibit 2). According to the World Travel and Tourism Council, tourism employs around 7% of Cyprus’ workforce and, based on central bank data, accounts for 9% of non-financial corporations’ gross loan facilities. Therefore, the industry’s revival is having positive ripple effects on local small and midsize enterprises and is contributing to a decline in unemployment to 12.0% as of May from 15.3% in May 2015 and a peak of 16.7% in October 2013.

1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.

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Melina Skouridou, CFA Assistant Vice President - Analyst +357.2569.3021 melina.skouridou@moodys.com

Antypas Asfour, CFA, PRM Associate Analyst +357.2569.3033 antypas.asfour@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 21 JULY 2016

EXHIBIT 2

Cyprus Tourist Arrivals

Source: Cyprus Statistical Service

Banks’ nonperforming exposures (NPEs), the Cyprus Central Bank’s assessment of troubled loans using the European Banking Authority’s broad definition, in the accommodation and food service activities declined 21% to €1.20 billion in March 2016 from €1.52 billion in May 2014. However, similar to total problem loans, NPEs in accommodation and food service activities remain at high levels, with the ratio of NPEs to gross loans declining to 56% in March 2016 from 63% a year earlier (see Exhibit 3).

EXHIBIT 3

Cyprus’ Tourism Revenue and Banks’ Nonperforming Exposures to Total Loans

Sources: Cyprus Statistical Service and Central Bank of Cyprus

According to government officials and sector participants, tourist pre-bookings suggest a strong year in 2017. However, although tourism originating from the UK declined to 39% of tourist arrivals in 2015 from 58% in 2003, a sustained weak sterling against the euro may adversely affect Cyprus’ tourism industry and therefore banks.

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Tourism Revenue - 12 Month Rolling Mean - left axis Tourism Sector Nonperforming Exposures - right axis

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Omani Banks’ Credit Growth Materially Outpaces Deposit Growth, a Credit Negative Last Thursday, the Central Bank of Oman (CBO) published its May 2016 Monthly Statistical Bulletin, showing 13.5% growth in the total credit extended by the country’s conventional and Islamic banks over the 12 months that ended in May, materially exceeding the low 0.4% growth in total deposits, a credit negative for Omani banks.

With lower oil prices continuing to drive reduced deposit inflows, the gap between credit and deposit growth is widening and has increased the system average net loan/deposit ratio to 108.4% as of May 2016, compared with 95.8% as of May 2015 and 103.5% as of December 2015.

This financing gap negatively affects banks’ funding and liquidity profiles. To fill the gap, Omani banks are increasing their reliance on market funding, which tends to be more expensive and more confidence sensitive than deposits. The banks are also using their liquid resources to make loans, which reduces their liquidity buffers.

Persistently low oil prices have driven a regional tightening in liquidity causing Oman and government-related issuers (GRIs) to reduce their bank deposits. Indeed, deposits from the government and GRIs declined 9.3% over the 12 months that ended in May 2016 (versus 14.9% positive growth over the 12 months that ended May 2015). Still, deposits from the government and GRIs remained high at 32% of total deposits as of May, versus 36% a year earlier.

We expect Omani banks’ market funding reliance to continue to increase from a modest 13% of total assets as of May (versus 8% a year earlier) to around 15% by year-end 2016. Indeed, Bank Muscat S.A.O.G. (Baa1/Baa1 stable, baa22) raised $500 million in April 2016, and National Bank of Oman Limited (SAOG) (Baa2/Baa2 stable, ba1) raised $100 million in July 2016 through euro medium term note (EMTN) programmes, and we expect Bank Dhofar SAOG (Baa2 negative, ba1) to issue from its $500 million EMTN programme set up in April 2016.

We expect Omani banks’ liquid resources to continue declining gradually over the year. So far, the reported total of cash on hand and deposits with the CBO, balances due from banks and securities declined to 28% of total assets as of May 2016, from 30% as of May 2015.

Omani banks are subject to an 87.5% regulatory lending ratio cap, computed as net lending (inclusive of eligible government soft loans) as a proportion of customer deposits, net balances due to banks abroad and capital funds. This ratio for the local banks increased to 81.1% as of April 2016 from 78.4% as of April 2015 and 79.1% at December 2015, reducing the headroom for the local banks to grow loans.

2 The bank ratings shown in this report are the banks’ deposit ratings and senior unsecured debt ratings (where available), and

their baseline credit assessments.

Mik Kabeya Analyst +971.4.237.9590 mik.kabeya@moodys.com

Francesca Paolino Associate Analyst +971.4.237.9568 francesca.paolino@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Sovereigns

Uruguay’s New Pulp Mill Project Is Credit Positive Last Friday, Uruguay (Baa2 negative) President Tabaré Vázquez announced the approval of a $5 billion pulp mill construction project. This would be the third such mill in the county following two successful projects that supported average economic growth of 4.7% in 2006-15. Growth slowed to 1% in 2015 from 3.3% in 2014 and we expect growth to slow further to 0.5% in 2016. Despite the fiscal costs of building supportive infrastructure for the private project, the new pulp mill is credit positive because it will provide a boost to Uruguay’s economic growth not just during the construction period beginning in 2018, but with supportive projects that will begin earlier.

Mr. Vazquez indicated that the construction of the pulp mill will begin during the second half of 2018, with production and exports likely to start after 2020. Finland-based company UPM will invest approximately $4 billion (7.6% of GDP) in the project. However, to make the pulp mill viable, infrastructure and additional investment is required, so the Uruguayan government has agreed to invest $1 billion (about 1.9% of GDP). This includes improvements to rural roads and railways, and the construction of a new deep-water port. The infrastructure upgrades will likely start in 2017 and we expect the projects to take 18-24 months.

UPM forecasts healthy demand for fiber and pulp. By the end of the 2020s, UPM expects the world demand for chemical pulp to grow by approximately 20 million tons. Some 24 million tons of capacity has been closed from uncompetitive mills around the world during the past 15 years and UPM expects the closures to continue at a similar pace, creating opportunity for newer, more competitive capacity.

Uruguay currently has two pulp mills, UPM’s Fray Bentos mill, which began operations in 2007, and the Montes del Plata mill on the River Plate, a joint investment by forestry companies Arauco of Chile and Stora Enso of Sweden. The two mills have turned pulp into one of Uruguay’s main exports, and the large investments tied to the mills supported strong economic growth that would have otherwise slowed significantly during the past 10 years.

The government expects that the entire project could generate up to 8,000 new jobs from the construction phase to the start of operations, while we estimate that it could boost GDP growth by 2.0-2.5 percentage points over the next five to seven years. The economic boost provided by the new pulp mill project will also benefit the fiscal accounts, given that government revenue growth is strongly tied to economic performance.

Jaime Reusche Vice President - Senior Analyst +1.212.553.0358 jaime.reusche@moodys.com

Carlos Morales-Villarreal Associate Analyst +1.212.553.0554 carlos.morales@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Failed Coup in Turkey Exacerbates Challenges for Growth, Financing and Reform Last Friday, factions of the military in Turkey (Baa3 review for downgrade) staged a coup, and failed. Although the government is in control, the event is credit negative because it has elevated political risks. The heightened political risks are likely to increase capital outflows, reduce economic growth and make economic policy less predictable.

Domestic political risks have been rising in Turkey since the Gezi Park riots in May 2013, which highlighted multiple divisions within Turkish society. Last week’s failed coup is another manifestation of underlying tensions in Turkey, and one that could significantly reduce investor confidence and have a negative effect on the foreign direct investment and external capital (both portfolio and debt investors) that the country needs to fund its current account deficit and support economic growth over the next two to three years.

Turkey has large external funding needs, which expose the country to sudden shifts in investor confidence. Investor confidence was already weak and volatile during 2015 and the first quarter of 2016, as reflected by the significant 13% depreciation from a year earlier of the Turkish lira versus the US dollar to around 3.04 as of 20 July, and large portfolio capital outflows. We expect that the coup attempt will increase these pressures.

Substantial investment outflows will have direct negative implications for Turkey’s credit quality given its significant external financing requirements. The country needs to finance a current account deficit equal to 3.4% of GDP this year, while Turkish corporate, banking and government sectors must repay approximately $197 billion in external liabilities. Together, we estimate these needs at around 25% of GDP in 2016 and 2017. These external financing needs are particularly onerous relative to the country’s foreign-exchange reserves, which led to a high External Vulnerability Index (EVI) of 189.5% this year and which we expect will remain elevated next year. The EVI is the ratio of external debt coming due in a year (both short term and long term currently maturing) to the central bank’s forex reserve holdings.

In addition to elevated domestic political risks, Turkey’s geopolitical environment is highly unpredictable. The attempted coup occurred amid a wave of recent terrorist attacks in Turkey, the government’s conflict with the Kurdistan Workers’ Party (PKK) and spillover tension in Turkey from Syria’s ongoing civil war and the crisis in Iraq.

A risk stemming from the coup is a further slowdown of the government’s economic reform agenda initiated in 2014 under the 10th developmental plan and which received a boost from the government earlier this year. Although some peripheral reforms have been adopted, the pace has been slower than what we expected.

Although economic growth in Turkey has been resilient to various shocks over the past two years, with GDP averaging 3.5%, we expect that the political uncertainty, and specifically the attempted coup, will reduce growth to 3.0% this year from our initial estimate of 3.4%, and could be lower as the full economic effect of the coup unfolds. Our estimate takes into account first-quarter growth of 4.8% from a year earlier, but we expect that the full effect of the failed coup attempt will be felt in the third and fourth quarters of this year, especially on personal consumption growth. Investment in Turkey, which is crucial to its economic growth, was already lagging and in the first quarter of this year turned negative from a year earlier. Consequently, we expect fragile investor confidence, slowing credit growth and subdued external markets to dampen growth this year.

Alpona Banerji Vice President - Senior Credit Officer +44.20.7772.1063 alpona.banerji@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 21 JULY 2016

The fallout of the failed coup may also lead to a greater concentration of political power and could lead to a reduction in the rule of law and checks and balances, exacerbating a deterioration in Turkey’s institutional strength. World Bank governance indicators and recent business surveys have already weakened over the past few years, and we believe that its key regulatory institutions have been exhibiting a lack of independence and are characterized by somewhat weak credibility. This trend is likely to have a further negative effect on investor confidence.

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 21 JULY 2016

Azerbaijan’s Recession Deepens with Oil Price Decline and Currency Devaluation, a Credit Negative Last Thursday, Azerbaijan’s (Ba1 negative) State Statistical Committee reported that year-over-year GDP contracted 3.2% in the second quarter of 2016 following a 3.6% decline in the first quarter and a 6.5% contraction in the fourth quarter of 2015. Three consecutive year-over-year quarterly declines in GDP are credit negative and reflect the severity of Azerbaijan’s economic, currency and banking crisis triggered by weak oil prices and the sharp devaluation of the local currency, the manat. Moreover, the contraction in real GDP is driving fiscal deficits higher, which is raising the government’s debt burden.

Year-over-year economic activity in non-oil sectors, the backbone of Azerbaijan’s formerly strong growth, contracted 6.1% in the first six months of the year, while the oil sector grew by 2.1%. The main driver of the decline in economic activity in the first half was the 33.6% contraction in construction. Cargo transportation also contracted 2.3%, which was partly offset by a 13.7% expansion in information and communication services and 2.4% growth in non-oil industrial production. Retail trade, following average growth of 11.7% over the past five years, slowed to 1.9% growth in the first half. The data are in line with our forecast of a 3.3% decline in real GDP in 2016. We expect real GDP growth to be around 0% in 2017 owing to a recovery in domestic demand amid the slowdown in inflation (see Exhibit 1).

EXHIBIT 1

Azerbaijan’s Real Year-over-Year GDP Growth

Sources: State Statistical Committee of Azerbaijan and Moody’s Investors Service

The sharp decline in construction (9% of gross value added as of the end of 2015 down from 16% a year earlier) is a result of the government’s cuts in capital spending and the contraction in lending. Following the decline in oil prices, Azerbaijan entered a stage of economic, fiscal and external readjustment. The policy response, particularly the decision to devalue the manat, helped to contain the effect of low oil prices, but exposed the banking system to a currency mismatch because deposits are more dollarized than loans (see Exhibit 2). As borrowers with local-currency incomes found it more difficult to repay foreign-currency loans, the devaluation damaged banks’ asset quality and profitability. Further stress on the banking system occurred as the depreciation led to the loss of depositors’ confidence and deposit outflows, forcing a decline in lending (the stock of credit fell by 11.1% year over year as of May 2016).

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Malgorzata Glowacka Associate Analyst +49.69.70730.938 malgorzata.glowacka@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 21 JULY 2016

EXHIBIT 2

Azerbaijan Banks’ Local and Foreign-Currency Deposits

Sources: Central Bank of Azerbaijan and Moody’s Investors Service

The weaker manat has also led to high inflation, reducing real income. According to the State Statistical Committee, inflation remained elevated at 10.5% on average in the first half of 2016. For this reason, we expect household spending to be subdued this year and recover only slightly in 2017 as inflation slows.

These developments highlight the economy’s severe adjustment to lower oil prices. With roughly 90% of exports, 60%-70% of consolidated government revenue and 50% of real GDP, Azerbaijan’s economy is one of the most exposed to oil price volatility. In addition, the contraction of real GDP is driving fiscal deficits higher, raising the government’s debt burden (see Exhibit 3). We expect the sovereign’s debt/GDP ratio to reach 29.6% this year, up from 11.2% in 2014.

EXHIBIT 3

Azerbaijan’s General Government Revenue, Expenditure, Fiscal Balance and Debt Burden as Percent of GDP

Sources: Azerbaijan Ministry of Finance and Moody’s Investors Service

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NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 21 JULY 2016

South Sudan Turmoil Is Credit Negative for Uganda Last Thursday, the army in Uganda (B1 negative) began evacuating its citizens from South Sudan (unrated), where heavy fighting stemming from an internal power struggle between President Salva Kiir Mayardit and his deputy has once again brought the country to the brink of an all-out civil war. The conflict is happening barely a year after the end of a two-year civil war in 2015 and is credit negative for Uganda because South Sudan is Uganda’s second most important export destination, with 10% of its total exports going to South Sudan during 2013-15 (see Exhibit 1).

EXHIBIT 1

Uganda’s Top Five Export Destinations

Sources: Central Bank of Uganda and Moody’s Investors Service

As was the case during South Sudan’s 2013-15 civil war, we expect a resumption of the conflict there to disrupt Uganda’s exports to the country, just as they were beginning to recover (see Exhibit 2). Speaking to the local press last week, the Kampala City Traders Association, the main umbrella body for the country’s traders, warned that the conflict in South Sudan was already costing its members and affiliate organizations roughly UGX3.3 billion ($1 million) per day.

EXHIBIT 2

Uganda’s Total Exports

Sources: Central Bank of Uganda and Moody’s Investors Service

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15

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16

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Rita Babihuga Assistant Vice President - Analyst +44.20.7772.1718 rita.babihuga@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 21 JULY 2016

As a result and notwithstanding a planned increase in infrastructure spending, Uganda’s 2016 real GDP growth is likely to be as much as one percentage point below our current projection of 5.3%. The Ugandan economy is emerging from a difficult period, having expanded by only 4.6% in the fiscal year that ended 30 June 2016, lower than the government’s projection of 5.0% and the 5.0% growth rate achieved in fiscal 2015. The lower growth is attributable to the slow execution of public investments, uncertainty related to February 2016 elections, a relatively tight monetary policy stance, which aimed to rein in inflationary pressures that ensued in the first half of fiscal 2016, and lower commodity prices that have affected export receipts.

Moreover, we would also expect weaker growth to exacerbate weaknesses in the government’s public finances, which have been adversely affected over the past year by election-related revenue and expenditure slippages. During the third quarter of fiscal 2016, the International Monetary Fund estimated that Uganda experienced revenue shortfalls of UGX180 billion (0.2% of GDP), which contributed to the net spending overrun of 0.1% of GDP for fiscal 2016. At 15.2% of GDP in fiscal 2015, Uganda’s tax revenue performance is already much lower than the 23.3% median for B1-rated peers.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 21 JULY 2016

US Public Finance

Alaska Adjourns Legislative Session without Fiscal Overhaul, a Credit Negative On 18 July, the State of Alaska (Aa1 negative) legislature ended a special session without agreeing on a plan to align revenues with expenditures, leaving the state’s budget deeply imbalanced. The failure to devise a sustainable fiscal structure is credit negative and means that for at least another year, the state will keep burning through its still-ample reserves, which were accumulated during years of high oil prices.

Alaska’s revenues have plummeted 80% because they are driven primarily by taxes on oil. As the price of oil has declined, so have Alaska’s revenues. Although the state has made some adjustments on the expenditure side, its budget remains heavily imbalanced (see Exhibit 1).

EXHIBIT 1

Alaska’s Annual Revenues and Expenditure

Source: State of Alaska

The legislature’s adjournment in the midst of this imbalance means that Alaska will run a big deficit in the fiscal year ending 30 June 2017. The state’s budget expects $1.2 billion of unrestricted general fund revenue and authorizes $4.4 billion of general fund spending. This deficit will again reduce the state’s available balances. Alaska’s Constitutional Budget Reserve Fund – its primary available balance – dwindled by almost $3 billion last year and will likely shrink by a comparable amount this year (see Exhibit 2). One of Alaska’s major credit strengths is that it built up considerable balances during the run-up in oil prices, giving it some time to run deficits before it runs out of cushion.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 E 2017 E

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Surplus/(deficit) General fund expenditures Unrestricted general fund revenueSurplus/(Deficit) General Fund Expenditures Unrestricted General Fund Revenue

Dan Seymour, CFA Assistant Vice President - Analyst +1.212.553.4871 dan.seymour@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 21 JULY 2016

EXHIBIT 2

Alaska’s Available Reserves Alaska is now spending down its considerable reserves.

Note: The Permanent Fund Earning Reserve is an additional reserve of available funds. Source: State of Alaska

Furthermore, the risks and uncertainties surrounding Alaska’s budget conundrum will perhaps extend into fiscal 2018. Alaska Governor Bill Walker has proposed a fundamental structural overhaul of the government’s fiscal operations to a sovereign wealth fund approach. Under his proposal, the general fund would be funded by investment income from the state’s $54 billion permanent fund. This plan carries its own risks and uncertainties. However, the lack of a plan is riskier and more uncertain. The governor’s assessment of the consequences of taking no action is dire. The state would deplete its Constitutional Budget Reserve Fund next year, and after that require budget cuts equaling 66% of the fiscal 2017 budget (assuming an optimistic oil price forecast of $55 per barrel).

We still believe the state will eventually come up with a sustainable solution rather than resorting to draconian cuts to vital public services. However, in the meantime, its reserves are shrinking and there is little visibility into when its reserve draws will be abated.

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Constitutional Budget Reserve Fund Permanent Fund Earnings Reserve

RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com

19 MOODY’S CREDIT OUTLOOK 21 JULY 2016

NEWS & ANALYSIS Corporates 2 » Boeing and Embraer’s KC-390 Partnership Bolsters Sales

Prospects for Both Companies » AMC Entertainment’s Planned Acquisition of Odeon Is

Credit Negative » UK Review of Acadia’s Priory Acquisition Is Credit Negative » LATAM to Get Credit-Positive Equity Increase in Deal with

Qatar Airways

Infrastructure 6 » Southern Company Further Diversifies into Natural Gas with

Credit-Positive Pipeline Acquisition » US Airports Will Benefit from Federal Aviation

Administration Reauthorization Bill » Brazil’s Compensation to Eletrobras Subsidiary Chesf Is

Credit Positive » China Merchants Holdings International’s Profit Warning Is

Credit Negative

Banks 10 » Brazil Allows Worker’s Fund to Guarantee Payroll Loans to

Private-Sector Employees, a Credit Positive for Banks » Costa Rican Banks’ Loan Delinquencies Will Likely Rise with

Local Currency Depreciation » EU Court Advocate General’s Statement on Mortgage

Interest Rate Floors Is Credit Positive for Spanish Banks » Bank of Ireland’s Capital Position Erodes as Brexit Effects

Drive Up Pension Deficits » Kazakhstan Unexpectedly Cuts Its Base Rate, a Credit

Positive for Banks

Sovereigns 17 » Ireland’s Economy and Public Finances Outperform

Expectations, a Credit Positive

Sub-sovereigns 19 » Japan’s Regional and Local Governments’ Tax Revenue Hits

Eight-Year High, a Credit Positive

MOODYS.COM

Report: 191218

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