Cape Verde: Risk Assessment
Country Risk Rating
|B||Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Growth highly dependent on the Eurozone
Cape Verdean growth is suffering from the subdued economic environment in Europe, on which the country is heavily dependent. Remittances from expatriates - most of them working in France and Portugal, account for 10% of GDP. Internal demand could, however, be boosted by a slightly more accommodating fiscal policy in 2016, an election year. Services will continue to be the main economic driver, in particular financial and IT services, but above all, tourism (about 25% of GDP). Activity in this sector remains, however, constrained by the lack of infrastructures. Although highly dependent on European tourism, Cabo Verde has made a considerable effort to attract tourists from other regions (especially from Asia). Inflation, chiefly determined by imported food and energy products, is expected to accelerate in 2016. Commodity prices, more specifically oil prices (20% of the country's imports) are unlikely to rise much, but higher interest rates in the United States, which could result in downward pressure on the euro and accordingly, as it is pegged to the euro, on the escudo, is expected to push up the prices of imported goods.
Budgetary and external vulnerabilities
The budget deficit is reducing. Investment spending on infrastructure projects will remain high, especially in the communications, transport and electricity sectors. Despite the determination to control the public finances so as to limit the expansion of debt, social spending cuts are unlikely in 2016 - a parliamentary election year. A slight increase in growth, as well as steps to widen the tax base should, however, help increase State revenues.
The level of public debt has risen sharply not only because of the need to finance investments, but also because of the escudo's depreciation against the dollar (75% of public debt is denominated in dollars). The risk of default remains contained, consisting essentially of concessional and long-term loans. The public debt dynamics are, however, a source of vulnerability in a context of weak growth.
There is a structural current account balance deficit due to the considerable need for imports of capital goods for carrying out infrastructure projects, as well as for food and energy. Exports, dominated by fish products (fish, seafood and processed products), as well as services (tourism and associated transport services) are unlikely to increase much due to only weak growth in external demand. The current account deficit will continue to be financed mainly by concessional loans from international institutions and FDIs, which will remain fairly substantial. The banking sector is dominated by European, particularly Portuguese, banks. It is still satisfactorily capitalized but weak economic growth could increase the ratio of non-performing loans and further weaken the sector.
Political stability and satisfactory governance
Cabo Verde is a settled democracy. The two main parties, the Movement for Democracy Party (MDP) and the African Party for the Independence of Cape Verde (PAICV), have been cohabiting since the end of 2011. Whilst the PAICV holds the majority in Parliament, President Jorge Carlos Fonseca is affiliated with the MDP. The two parties will face each other during the parliamentary elections scheduled for February 2016. Although the country’s stability is not under threat, the high level of unemployment (16% on average but 32% among young people) is leading to growing discontent with the Presidential party, and could result in popular demonstrations. Cabo Verde is among the top countries in sub-Saharan Africa according to the World Bank governance indicators, in particular in fighting corruption.