Cape Verde: Risk Assessment
Country Rating1
Rating: B
Business Climate Rating1
Rating: B
Risk Assessment2
A continuing recovery thanks to tourism and expatriates
In 2011, even more than in 2010, economic activity is expected to benefit from the recovery of the tourist industry with the return of European visitors, a resumption in foreign investment associated with tourism, and a revival of "second" home construction by expatriate workers.
Shaky public sector accounts now expected to improve
However, after the legislative and presidential elections of January and February 2011, fiscal policy is expected to be less accommodating than in 2009-2010, when the authorities chose to combat the effects of the crisis by helping households with grants and tax cuts while also making substantial increases in public spending and investment (up 45% in 2009, up 20% in 2010). Even though spending on road, port, hydraulic, and electric infrastructure, will continue with support from international financial backers, the deficit which has grown during the crisis will be reduced via a slowdown in current spending, (with measures like the freeze on public sector hiring), and an increase in revenues.
The monetary policy will remain relatively restrictive. The country needs to control inflation caused by the increase in prices for oil and imported foodstuffs and attract the savings of expatriate Cape Verdeans living in Portugal, France and the USA, a total population twice that of the archipelago itself.
Crucial international development aid
The current account balance will remain substantially in deficit, despite increases in tourism revenues, FDI, and expatriate worker remittances representing 10% of GDP. Manufacturing exports (primarily fish, textiles, shoes) will grow but still remain marginal. Food needs and infrastructure spending always generate massive inflows of imports. A large proportion of these are financed by loans that have mostly been taken out with foreign countries and international organizations on preferential terms. Thanks to these terms, foreign currency reserves can be maintained at decent levels and debt service is virtually negligible with a 26-year average maturity and 1.8% interest. The country thus remains dependent on its access to concessional financing which is expected to continue to be available in the short term.
Strengths
- Partnerships with EU (85% of trade)
- Major tourism potential
- Considerable fishery resources
- Near western Africa and halfway between Europe and America
- Banking services and mobile telephony
- Currency pegged to the euro
Weaknesses
- Dependence on international backers, the diaspora, and tourism
- Insularity, fragmentation and aridity of the territory
- Insufficient infrastructure, limited electricity and transport networks
- Inadequate agriculture and manufacturing industry
- Need to import most manufactured goods and food
- 18% unemployment (30% among youth)