P 030812Z MAR 09
FM AMEMBASSY ANTANANARIVO
TO SECSTATE WASHDC PRIORITY 2161
INFO AFRICAN UNION COLLECTIVE PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
DEPT OF COMMERCE WASHDC PRIORITY
DEPT OF AGRICULTURE WASHDC PRIORITY
MILLENNIUM CHALLENGE CORP  PRIORITY

UNCLAS ANTANANARIVO 000144 
 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
USDOC FOR BECKY ERKUL - DESK OFFICER 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON ENIV EPET MA
SUBJECT: MADAGASCAR:  THE ECONOMIC CONSEQUENCES OF 
POLITICAL CRISIS 
 
REF: 08 ANTANANARIVO 625 
 
¶1. (SBU) Summary: As politicians wrangle for power in 
Antananarivo, business owners, street vendors, consumers, and 
the Malagasy population in general are paying a heavy price 
for the feud.  Although the medium and long-term impacts on 
the economy will depend on rapidity of crisis resolution, 
short-term damage is already significant.  Historical 
examples and the current pace of negotiations indicate that a 
solution will not come quickly; thus, the mid-term economic 
outlook appears grim.  The crisis does provide a fresh and 
urgent opportunity to push the GOM on needed improvements in 
the investment climate, however.  End summary. 
 
¶2. (SBU) According to a study conducted by the leading 
international financial institutions (IFIs) in Madagascar, 
direct business losses due to burning and looting in January 
and February amount to USD 26 million, or close to USD 50 
million taking into account the loss of profits and new 
investments.  The study estimates that more than 10,000 
people have lost their jobs, not including those that have 
been laid-off in the garment sector.  The curfew which has 
been in effect for over one month has particularly hurt 
restaurants and taxi drivers. Almost daily protests have led 
to the closure of businesses adjacent to protest areas and 
interrupted the operations of microentrepreneurs.  Following 
the looting of the wholesale distributor MAGRO and other 
grocery stores January 26, food prices spiked.  Although they 
have begun to decline, distributors and merchants continue to 
charge higher prices than pre-crisis, impacting the most 
vulnerable population.  Imports of consumer goods have 
declined by 30 percent with respect to 2008 figures. 
 
¶3. (SBU) The longer the political turmoil continues, the more 
severe the indirect effects will be, particularly on key 
export sectors and foreign investment.  Following travel 
alerts by France, the U.S., and the U.K., tourism is already 
suffering, with hotel occupancy rates of only 10 percent and 
a 40 percent reduction in international flights.  The textile 
sector, which was already weakened by waning international 
demand, is receiving fewer international orders and has had 
to lay off hundreds of workers and close at least one factory 
to date.  Factory owners fear that this trend will intensify 
if a political solution does not emerge soon.  The sector 
provides almost one-third of formal sector employment; mass 
lay-offs could further inflame political tension in the 
capital area.  The already poor investment climate has 
deteriorated further due to the crisis, with Standard and 
Poor's downgrading Madagascar's sovereign debt from stable to 
negative. 
 
¶4. (SBU) The government's ability to function has been 
hampered by the crisis.  The lack of a functioning 
counterpart with which to negotiate is pushing some foreign 
investors, such as Exxon-Mobil, closer towards the exit door. 
 Exxon, which was already butting heads with President 
Ravalomanana over concession renewal (reftel), has now 
permanently reassigned one of its three expats and has 
temporarily sent the other two back to the United States. 
Although the company, which has already invested over USD 60 
million in exploration, is considering sending a team to 
Mahajanga to prepare for possible offshore drilling, the 
ongoing political crisis could end up being the straw that 
broke the camel's back. While the two large mining 
investments (QMM - entered operations last December and 
Ambatovy - expects to begin production by first quarter 2011) 
that are already underway are forging ahead, other new 
entrants are likely to be deterred by falling global mineral 
prices and the ongoing political uncertainty. 
 
¶5. (SBU) Government tax revenue is expected to decline this 
year due to the projected fall in economic activity, 
particularly because of a loss of import duties and value 
added taxes.  Several business associations, including the 
Groupement des Entreprises de Madagascar (GEM), have 
negotiated a two-month tax holiday with the government to 
enable their members to manage cash flow through the current 
crisis.  Businesses that were looted are looking to the 
government for other support, such as subsidies, as well. 
Insurance companies are refusing to pay claims, asserting 
that the January riots constituted political, not criminal, 
activity; the GOM may refute that claim publicly in order to 
support claims for insurance coverage.  In response to 
scapegoating of foreign investors and negative comments made 
about large mining and agricultural projects by the 
opposition, the newly-formed American Chamber of Commerce is 
planning to launch an ad campaign to point out the benefits 
of foreign investment and the number of jobs at stake, while 
avoiding direct political messages. 
 
¶6. (SBU) Comment: If Madagascar's protracted political 
disputes in 1991 and 2002 serve as models for the current 
conflict, mid-term economic prospects look grim.  GDP growth 
of negative 12 percent and the damage to Madagascar's 
international reputation took years to overcome following 
events in 2002.  On the brighter side, this political crisis 
does provide an opportunity for the GOM to address some of 
the pre-existing economic governance problems here, including 
myriad conflicts of interests, a lack of transparency, and 
the government's failure to provide a level-playing field for 
investors. We will be pushing for such reforms and arguing 
against a return to "business as usual" unless we see 
significant changes in these areas.  End comment. 
 
MARQUARDT