Cabo Verde: Risk Assessment
Country Risk Rating
Business Climate Rating
- Growth of tourist activity
- Fisheries’ reserves
- Efficient banking and telecommunications services
- Stable, independent political institutions
- Very high level of public debt
- High unemployment (15%, 28.6% among young people)
- Poor infrastructure quality; lack of maintenance
- Food and energy wholly imported
- Dependence on external shocks, international aid, the diaspora, and tourism
- Exposure to climate change, volcanic and seismic events, cyclones
A Strong Economic Performance Again in 2018
In 2018, Cabo Verdean growth should remain at the same level as in 2017, benefiting in particular from the activity of its European economic partners. There should be an increase in tourism revenue, predominantly via in accommodation and restauration. The growth of European countries – although moderate – should contribute to this growth, as they are the main source of tourists to Cabo Verde (81% in 2016). The number of British tourists (the United Kingdom is the main country of origin of Cabo Verde tourists) is expected to continue to grow, albeit at a slightly slower rate due to the initial effects of the Brexit referendum. Nevertheless, the structural constraints related to the lack of diversification of the economy remain significant. The dependence on tourism and public spending remains a dominant factor.
The government’s fiscal policy of austerity is set to continue in 2018, and should result in a reduction of public investment spending in favor of private investment, particularly through foreign direct investments (FDI), mostly from the United Kingdom and China, in the tourism and real estate sectors.
Household consumption should grow slightly, benefiting from low inflation. It should also be favored by the economic situation of Portugal, which is the main source of income inflow from workers abroad (11% of GDP). However, it may be negatively affected by the decline in consumer confidence.
Reduction of Budgetary Expenditure and a Current Account Deficit Mainly Covered by FDI Flows
The budget deficit is expected to continue to decline in 2018, as in the previous fiscal year. The government is expected to reduce its spending on investments, subsidies, and purchases of goods and services, as well as implement privatization. However, payroll should not decline in 2018, given the lack of short-term flexibility. The decrease in public investment, from 10.3% of GDP in 2013 to 3.5% in 2016, could have a negative impact on growth in 2018. Recent tax reforms, particularly the tax exemption during the start-up period of a business, should encourage private initiatives. The public debt level is expected to stabilize, while remaining at a high level. The risk of default remains under control, mainly in the form of concessional loans from international organizations and long-term loans.
The current account balance, structurally in deficit due to the country’s dependence on imports of consumer goods (40%), intermediate goods (25%), and energy (8%), could benefit from the appreciation of the escudo, Cabo Verde’s currency. Given that this currency is pegged to the euro, its appreciation should contribute to declining prices of imports from non-European trading partners. Exports, dominated (81%) by fishing products (fish, seafood, and processed products), are expected to increase slightly due to foreign demand, which is also expected to grow slightly. The current account balance is therefore significantly in deficit for goods and in surplus for services. The current account deficit remains primarily funded by FDI (7.3% of GDP) and remittances from Cabo Verdeans in Europe (11% of GDP).
Given that the capital market and the financial market remain underdeveloped, the banking sector is the primary source of financing. It is dominated by European banks, particularly Portuguese banks. The central bank has taken measures over the past two years to improve its credit profitability, which, unlike its accessibility, is low. The microfinance sector should continue to develop in order to finance very small businesses.
Despite Political Stability, a Slight Deterioration of the Business Climate
Cabo Verde is an established democracy. The country is among the top-ranked countries in sub-Saharan Africa according to World Bank indicators, in particular on fighting corruption (44th out of 214 countries).
The Movement for Democracy Party won the legislative elections of March 2016, and its candidate, Jorge Carlos Fonseca, was re-elected to the head of the country for a second term during the first round of the presidential elections of the 2nd October 2016. The current government’s priorities are to reduce the unemployment rate and the budget deficit. Recent changes in foreign policy are directed towards China: Chinese investment is constantly increasing and is expected to be concentrated in the sectors of tourism and infrastructure, as well as in the construction of a special economic zone. The main tool of this cooperation is the Africa-China Development Fund.
Cabo Verde’s Doing Business ranking remains rather stable (129th out of 190 countries), and the country has one of the best business climates in sub-Saharan Africa. However, it suffers from the lack of infrastructure, especially electrical, and the absence of regulations governing insolvency.