VZCZCXYZ0000
RR RUEHWEB

DE RUEHAN #0265/01 1000826
ZNR UUUUU ZZH
R 100826Z APR 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 2317
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ANTANANARIVO 000265 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR AF/EPS AND AF/E - MBEYZEROV 
DOC FOR DESK OFFICER - BECKY ERKUL 
TREASURY FOR FRANCOIS BOYE 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON MA
SUBJECT: MADAGASCAR: ECONOMY SUFFERS AS CRISIS CONTINUES 
 
REF: A) Antananarivo 144 B) Antananarivo 252 
 
¶1. (SBU) Summary: The political crisis in Madagascar has already 
negatively impacted unemployment, tourism, inflation, and exports. 
The economic downturn, increased inflation, and depreciation of the 
currency are likely to continue during 2009, with analysts 
predicting annual GDP growth of only 3 percent, compared to over 7 
percent in 2008, assuming the political situation stabilizes by May 
- and lower if it does not.  Although the economic downturn has 
mainly affected city-dwellers, the livelihoods of the three-quarters 
of the population who live in rural areas are also threatened by a 
proposed transition government plan to sell subsidized rice - a plan 
that could diminish incentives for producing rice and threaten the 
island's already precarious food security.  End summary. 
Impact of the Crisis: Unemployment Spikes 
-------------------- 
¶2. (U) In late January, following looting in cities throughout the 
country, hundreds of shops closed their doors.  According to the 
business chamber GEM (Groupement des Entreprises de Madagascar), 
10,000 workers lost their jobs during the two main days of looting 
(January 26 and 27) alone (ref A).  The slowdown of economic 
activity during February and March due to political demonstrations 
and strikes then led many enterprises to lay-off additional workers. 
Since the beginning of March, up to 10 companies per day have 
declared plans to lay-off workers at the Ministry of Labor. Aid 
agencies estimate that as many as 50,000 workers had lost their jobs 
by late March. 
 
Impact of the Crisis: Tourism Falls 
-------------------- 
¶3. (U) The tourism sector has been hard hit by the crisis, with 
foreign tourists cancelling their visits due to security concerns 
(ref A). According to the National Tourism Office, the cancellation 
rate was more than 80 percent for the first quarter. The hotel 
occupancy rate was estimated at less than 10 percent during this 
period (compared to 40% last year over the same period). Tourism 
operators were obliged to lay-off 60 percent of their employees. 
Total employment in this sector is estimated at 30,000, not 
including indirect employment in the transportation and handicraft 
sectors. Last year, 378,000 tourists visited Madagascar, and the 
sector yielded USD 393 million in revenue. Tourism was Madagascar's 
second most important source of foreign currency after the mining 
sector. 
 
Impact of the Crisis: Inflation Increases 
-------------------- 
¶4. (U) Nationwide, monthly inflation for February reached 1.83 
percent compared to 0.99 percent for January. Food, beverage, and 
tobacco prices increased by 2.8 percent between January and 
February, compared to 1.4 percent between December 2008 and January 
¶2009. Price increases disproportionately impacted the capital, where 
looting was the most widespread. During the week following the 
looting in late January, the prices of rice, sugar and floor 
increased by more than 10 percent in Antananarivo whereas the price 
of cooking oil increased by 70 percent. By the end of February, 
prices had stabilized, except for that of cooking oil which remained 
high. 
 
Impact of the Crisis: Exchange Rate Depreciates 
-------------------- 
¶5. (U) In 2008 and the first two months of 2009, the Ariary 
appreciated against the Euro. However, the Ariary began to 
depreciate in the beginning of March. On March 1, one Euro was worth 
2440 Ariary, but by March 31, one Euro was worth 2611 Ariary, 
representing a 7 percent depreciation of the Ariary in one month. 
Transactions on the foreign exchange market declined to EUR 69.7 
million in March 2009, compared to EUR 84.7 million in February 
2009, a 17.7 percent decrease.  The Ariary also began to depreciate 
more rapidly against the U.S. Dollar in late March, and transactions 
on the foreign exchange market declined from USD 165.6 million in 
February 2009 to USD 110.13 million in March 2009. The depreciation 
stems from the decrease in tourism activities and exports which are 
the main sources of foreign currency for the economy. Depreciation 
will be compounded by the reduction in foreign investment flows to 
Madagascar, as well as by the cuts in foreign aid by donors in 
response to the illegal coup d'etat in March. 
 
Impact of the Crisis: AGOA Exports Decline 
----------------------- 
¶6. (U) Compared to last year, exports under the African Growth and 
Opportunity Act (AGOA) have decreased this year. Exports under AGOA 
amounted respectively to USD 15.7 million and 15.5 million in 
January and February 2009 (compared to USD 17.8 million and 16.6 
million in 2008). This decline resulted partly from the global 
financial crisis, which has led to declining demand for garment 
exports in the West, and partly from buyers' reluctance to place 
orders from Madagascar given the political uncertainty. 
 
Predicted Impact: Exchange Rate Depreciation 
---------------- 
¶7. (SBU) The depreciation observed since March will continue. 
Madagascar's main sources of foreign currency are exports, tourism, 
foreign investment, and foreign aid. Tourism was harmed by the 
political crisis. Exports are declining due to decreasing global 
demand and the political crisis.  Foreign aid will be reduced 
following the decision of some donors to cut aid programs in 
Madagascar. FDI, which was driven by the construction of two large 
mining projects in 2007, began to fall in 2008 as construction 
neared a close in one project and slowed down in the other.  In 
early 2009, QMM, a large Rio Tinto investment in the South, entered 
into operation, while the Ambatovy project in the East slowed 
construction due to a credit crunch.  Because of all these factors, 
the supply of foreign currency cannot keep pace with demand, and 
further depreciation of the Ariary is likely. 
 
Predicted Impact: Increased Inflation 
---------------- 
¶8. (U) Although depreciation may give a needed boost to exporters by 
making their products cheaper for foreign buyers, depreciation has 
generally been associated with high inflation in Madagascar. The 
country imports most of its consumer goods and all investment goods, 
including fuel. As the value of the Ariary falls, the local currency 
price of imported goods will increase, leading to an increase in 
overall prices. 
 
Predicted Impact: Declining Fiscal Revenue 
---------------- 
¶9. (U) Two months of strikes and demonstrations and a lower than 
normal level of economic activity will result in lower tax revenue. 
The government will have difficulty financing its current 
expenditure due to this declining revenue and donors' suspension of 
aid, which accounts for around one-quarter of the government budget 
(ref B). Although the government's consumption represents only 4 
percent of GDP, a decrease in this expenditure will affect the 
government's suppliers and contractors, which will face lower demand 
for their products. 
 
Predicted Impact: Lower Economic Growth 
---------------- 
¶10. (U) The increase in unemployment will result in the reduction of 
private consumption by households, and thus a reduction in total 
demand for consumer goods such as food, textiles, and services. The 
decline of the tourism sector will spill over into other sectors, 
including transportation, agriculture and other services. A decline 
in exports will affect not only producers and exporters, but also 
companies providing export services, including transportation. Given 
that the services sector accounts for more than half of GDP, a 
decline in commercial and service activities will strongly impact 
the whole economy. The vicious cycle of reduced economic 
activity-unemployment-low income-low demand will result in lower 
economic growth compared to 2008.  Economic analysts project a 
growth rate of 3 percent for 2009, assuming that the crisis ends in 
May and that the tourism sector resumes its activities during the 
high season beginning in June. If the crisis continues, growth 
projections will be lower. 
 
Subsidized Rice 
--------------- 
¶11. (SBU) The Ravalomanana administration had launched a "green 
revolution" in 2008 to boost Madagascar's rice yields by adding a 
second harvest and providing farmers with improved seeds and 
fertilizer.  The progress made over the last year has been 
threatened by the transition government's announced plan to sell 
subsidized rice at half the market price.  Roughly three-fourths of 
the island's population live in rural areas and rely on rice farming 
and raising cattle to survive.  Dumping below-cost rice on the 
market could cause the market price to fall, resulting in lower 
returns for farmers.  The scale and duration of the program are not 
yet known, but it has the potential to disrupt the rice market, 
provide disincentives for production, and eventually threaten the 
island's precarious food security. 
 
Comment 
------- 
¶12. (SBU) The rice subsidy program, which favors the small, 
politically active urban population to the detriment of the large, 
apolitical rural one, is no doubt politically motivated.  The 
transition regime has also pledged cheap oil, bread, and 
transportation in populist attempts to court supporters in cities 
throughout the island. End comment. 
 
 
MARQUARDT