VZCZCXRO2403
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHAN #0366/01 1460658
ZNR UUUUU ZZH
P 260658Z MAY 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC PRIORITY 2451
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP  PRIORITY

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000366 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
USDOC FOR BECKY ERKUL - DESK OFFICER 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV MA
SUBJECT: MADAGASCAR: DOWNWARD ECONOMIC SPIRAL 
 
ANTANANARI 00000366  001.2 OF 002 
 
 
¶1. (SBU) Summary:  Madagascar appears to be headed towards a 
serious recession, as diminished government spending, loss of 
investor confidence, flagging exports, and suspension of 
donor funds translate into a loss of jobs and a slowdown of 
GDP growth.  In addition to increased poverty, the transition 
authority (HAT) could, over time, face serious problems in 
its ability to pay civil service and military salaries if tax 
revenues continue to fall, and donor funds remain suspended. 
End summary. 
 
Budget Shortfalls Met By Slashing Spending 
------------------------------------------ 
¶2. (SBU) Due to diminished tax and customs revenue (29 
percent below target) and the suspension of donor funds, the 
Malagasy government is facing a serious budget crunch.  In 
response, the government has cut virtually all spending 
except salaries and debt payments, but will still need to 
finance a deficit.  As external funding from the IMF is no 
longer available, the government plans to increase domestic 
borrowing specifically for financing the budget deficit by 14 
percent over initial projections during the latter half of 
¶2009. (Note: This 14 percent estimate, along with the 
government's revised annual revenue projections detailed 
below (down only 18.8 percent) seems overly optimistic, given 
the actual figures for the first four months and the 
likelihood of continued political uncertainty through 
year-end.  End note.) 
 
- Domestic Tax and Customs Revenue for Jan - Apr: Target: 351 
million USD; Actual: 248.7 million USD 
- Domestic Tax and Customs Revenue projected for 2009: 
Original: 1.206 billion USD; Revised: 1.069 billion USD 
(Note: The downward revision is due mainly to a fall in 
customs revenue because of declining international trade and 
to the poor performance of the fiscal administration.  End 
note.) 
- Government Revenue from Foreign Aid projected for 2009: 
Original: 405 million USD; Revised: 232 million 
- Government Expenditure projected for 2009: Original: 2.089 
billion USD; Revised: 1.595 billion USD 
- Projected domestic borrowing to finance 2009 budget 
deficit: Original:  103 million USD; Revised: 120 million USD 
  (Note: Overall treasury bond issuance by the GOM is 
projected to increase by 34 percent compared to 2008 (from 
USD 657 million to 880 million) however most of this increase 
will be used to repay prior T-bonds, rather than finance the 
budget gap.  End note.) 
 
Source: GOM and World Bank data; USD calculations based on 
exchange rate of 1 USD per 1950 Ariary 
 
GDP Growth Languishes as Job Losses Multiply 
-------------------------------------------- 
¶3. (SBU) Because of the compounded impact of the global 
financial and Malagasy political crises, the tourism, 
textile, shrimp, and construction sectors have reported 
thousands of job losses.  Customs data indicate a 25 percent 
decline in the value of textile exports during the first 
quarter of 2009.  Operators predict further declines due to 
falling global demand and the possible loss of eligibility 
for African Growth and Opportunity Act trade preferences for 
the U.S. market.  The suspension of donor funds and 
government public investment (of which donor funds 
represented 75 percent) has produced a slowdown in 
construction and public works activities.  The construction 
union has estimated that the crisis will cause a 40 percent 
loss of company turnover during the remainder of 2009. 
 
Balance of Payments Concerns 
---------------------------- 
¶4. (SBU) In early 2008, the local currency, ariary, was 
facing pressure to appreciate due to large capital inflows 
from the mining sector, donor funds, and booming exports. 
That trend began to reverse in the third quarter of 2008, as 
mining construction projects were completed and global export 
demand diminished, and it intensified in the first quarter of 
2009 as foreign aid flows were cut.  During the first 
quarter, Madagascar's main export staples -- textiles, 
shrimp, and vanilla -- were down 40 percent in value terms 
compared with the same period in 2008.  Since the beginning 
of October 2008 to date, the ariary has lost almost twenty 
percent of its value vis-a-vis the U.S. dollar.  This 
 
ANTANANARI 00000366  002.2 OF 002 
 
 
depreciation has made Malagasy exports more competitive, 
however it has also increased inflationary pressure and 
raised the risk that the currency will excessively depreciate 
due a loss of confidence in the ariary. The Central Bank 
lacks sufficient foreign exchange to defend against this 
potential overshooting which could produce a balance of 
payments crisis. 
 
Bright Spots, For Now: Banking, Inflation, and Agriculture 
--------------------- 
¶5. (SBU) Despite the economic turmoil, the banking system 
remains sound, with deposits holding steady.  Inflation has 
been controlled, up by only 10.4 percent at the end of April 
year-on-year.  The Central Bank has maintained prudent 
monetary policies and has even reduced its lending to the 
government by one percent since year-end 2008.  The 
agricultural sector, which employs three-quarters of the 
population mainly in subsistence rice farming, is performing 
well this year due to fair weather conditions.  (Note: The 
weather likely has more of an impact on island-wide poverty 
than the macroeconomic and governance conditions, which 
disproportionately impact urban dwellers.  It is these urban 
dwellers, however, that are politically-active and may react 
negatively toward the transition government.  End note.) 
 
Comment 
------- 
¶6. (SBU) While the calm of last two months may lead to an 
upswing for the tourism sector, exports and foreign 
investment are likely to continue their decline for the 
foreseeable future.  As a result, customs revenues will 
remain low.  If Madagascar enters into recession, tax 
revenues will further diminish due to the slowdown in the 
productive sectors.  If the transition government does not 
move toward reinstituting democracy to regain donor funds, 
the GOM could eventually lack the capacity to pay civil 
servant and or security forces salaries.  Most estimates here 
indicate that such a fiscal train wreck is many months away, 
and other factors could delay it further still. End comment. 
STROMAYER