HIGH RISK for entreprise
Business environment risk
Madagascar is among the poorest countries in the world (about two-thirds of the population lives below the poverty line). As a result, any inflation shock hits its population hard, with strong consequences for the political instability observed during the last decades. Economic diversification is not very strong, and commodity-driven sectors still account for the bulk of economic activity, as well as employment. Agriculture contributes about 40% of good exports (half explained by vanilla) and the mining sector stands for another 30% (with nickel coming first).
These resources are putting Madagascar on the radar of global corporates. However, the poor progresses made in terms of business climate threaten the implementation of investment plans, meaning that the capital stock still remains quite poor. More political stability would be needed in order to make more effective progress in terms of policymaking processes.
Madagascar is benefitting from a genuine growth acceleration to +5% in 2018 and growth expectations are good as well (+5.2% in 2019), partly driven by favorable export performance (+8% per year on average). Inflation is increasingly under control (+6.1% y/y in December), meaning that purchasing-power issues are progressively normalizing. After a lost decade (from 2009 to 2016), Madagascar should now be able to enter a new growth cycle that will allow it to improve average GDP per capita and reduce poverty.
Against this background, the fiscal deficit has increased to -4% of GDP in 2019 but remains manageable since public debt is under control (36.5% of GDP), as well as external debt (33.5% of GDP). Foreign currency liquidity is adequate, with FX reserves at 4 months of import cover, and the debt due representing about 20% of FX reserves. IMF guidance is increasing the credibility for the fiscal path followed. Moreover, increasing FDI inflows cover 75% of the observed current account deficit.
However, the business climate is still quite weak since the World Bank Doing Business 2019 survey ranks Madagascar 161 out of 190 countries (above Cameroon, Gabon and Angola). Overall, there is strong divergence between items where Madagascar regulation is among the worst in the world (185th on getting electricity and 183rd on dealing with construction permits) and others where Madagascar has made real improvements (81st on starting a business, better regulation than African peers). However, Madagascar should deepen and broaden its reforms in order to improve its business climate further.
Madagascar has experienced several periods of political instability during its history. Elected presidents were often deposed before the end of their terms, such as M. Rovalomanana in 2009. Divides between the two main political forces (Ravalomanana’s TIM party and Rajoelina’s TGV party) are recurrent and confrontational. They came in the past in combination with land repartition issues and foreign interest for arable land, a sensible issue in a country where the population mainly works in the agricultural sector.
The political situation stabilized with the 4th republic introduced after a transition period from 2009 to 2013. The 2018 election was almost peaceful and the result was accepted by the opposition: A. Rajoelina defeated M. Ravalomanana in the second-round with 56% of the votes. The incumbent president should now translate this relative peaceful transition into effective reforms in order to improve the business climate.