Madagascar: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Despite a freeze on a high proportion of foreign aid, the economy has not collapsed
After suffering considerably from the effects of the political crisis and world economic crisis in 2009, the economy grew slightly in 2010 thanks especially to a record rice harvest, the restoration of calm in both industry and the informal economy, the $100 million bonus paid by China for an iron ore concession, and the revival of the tourist sector. Thus, despite the freeze on a high proportion of foreign aid after the March 2009 coup, the economy has not collapsed. Economic policy was adjusted to the new situation, which made it possible to limit the deterioration of public finances and keep inflation under control. Payment of foreign debt service was secured.

The extent of the recovery will depend on political developments.
The improvement in economic conditions is expected to continue in 2011, but the extent of the recovery will depend on how the political situation plays out and its consequent impact on the attitude of foreign donors: should the political situation remain unchanged, economic activity will remain constrained by the freeze on public foreign aid. The interruption of that aid has resulted in a 50% reduction in fiscal spending on investment and maintenance with the available resource devoted to the payment of civil service and military wages and foreign debt service. Payment of invoices from local suppliers is, however, subject to delay. Humanitarian aid transiting by non-governmental organisations has, alone, made it possible to finance social spending. In any case, however, the fiscal constraint will likely ease somewhat thanks to the growth of fiscal revenues resulting from the expansion of domestic economic activity, including in mining and forestry.
The Central Bank will continue to pursue prudent policy, maintain its key interest rate at levels conducive to the stability of prices and also the Malagasy ariary exchange rate.

Improvement in the trade balance has offset the reductions in FDI and aid
The deficit in foreign trade declined in 2009 and 2010. With the abrupt halt in public investment, imports contracted much more than exports. Although sales of textile products fell 20% after the United States suspended Madagascar from the benefit of the African Growth Opportunity Act, sales of ilmenite from the Taolagnaro mine increased. The resulting improvement in the trade balance did not suffice, however, to keep the overall balance of payments from slipping into deficit in the wake of the freeze on public aid (1/2 of total aid) and foreign investment. Foreign debt increased slightly in consequence. Further growth is expected in 2011 in tourism earnings and ore shipments as well as in cocoa, coffee, vanilla, and clover. Shipments of wood could, however, suffer from a resurgence of illegal tree-cutting and shipping with the complicity of some local civil servants and of foreign companies in countries that tend to turn a blind eye. The growth of exports in conjunction with the low level of imports is expected to ease the external constraint.

Uncertain political situation
The political situation underwent some changes in 2010. Andry Rajoelina, who heads the High Transition Administration (HTA), which has not been recognised by the international community since its creation in the wake of the March 2009 coup, obtained approval by referendum on 17 November 2010 (53% turnout and 74% yes votes) for maintaining the HTA and proceeding with elections in 2011. Although deposed President Marc Ravalomanana and the opposition parties have refused to recognise the election process, none of the adversaries seems capable of winning election. The Malagasy security forces that underpin the HTA could impose a compromise. The military putsch attempted on the day of the referendum underscores the shakiness of the political situation.

Strengths

• Substantial agricultural potential
• Virtually self-sufficiency in rice, the basic foodstuff
• Substantial mineral and hydraulic power resources
• Tourist potential

Weaknesses

• Political crisis
• Poverty affecting two thirds of the population, mainly in rural areas
• Sensitivity to climatic changes
• Deforestation, erosion, and trafficking in rare species
• Dependence on foreign aid
• Limited export diversification
• Financial sector underdeveloped
• Inadequate road, hydraulic, and electricity networks