VZCZCXRO3093
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHAN #0573/01 2160701
ZNR UUUUU ZZH
R 040701Z AUG 09 ZDK
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 2726
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 ANTANANARIVO 000573 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/E - MBEYZEROV 
STATE PLEASE PASS USTR 
USDOC FOR DESK OFFICER - BECKY ERKUL 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EAGR MA
SUBJECT: MADAGASCAR: FIRST SEMESTER 2009 MACROECONOMIC REPORT 
 
ANTANANARI 00000573  001.2 OF 003 
 
 
SUMMARY 
------- 
¶1. (SBU) Unofficial GDP projections for 2009 are around negative 
four percent due to poor performance of the secondary and tertiary 
sectors resulting from the global slowdown and political instability 
in Madagascar.  During the first half of 2009, inflation remained in 
check, while unemployment spiked.  The government drastically cut 
expenditures, particularly public investment, due to falling 
revenues and foreign aid cuts, focusing on wages and debt payments 
during the second quarter.  The government should be able to 
continue meeting wages and debt obligations for the remainder of the 
year.  Domestic borrowing was down 35 percent during the first 
semester 2009 compared to the same period in 2008.  Trade plummeted 
during the first semester, with exports declining by 47 percent 
compared with the previous year.  Foreign reserves declined by 12 
percent in the first half of the year due to the central bank's 
intervention to stabilize the exchange rate.  Limited planting of 
counter-season rice, as well as risks to AGOA trade benefits and EU 
aid in the second half of the year, paint a grim economic outlook 
for the second semester and 2010.  End summary. 
 
Negative GDP Outlook 
-------------------- 
¶2. (U) Official real GDP growth projections for 2009 are now 0.7 
percent, but unofficial estimates of around negative 4 percent are 
more realistic, considering the ongoing decline of activity in the 
fishing/shrimping, agro-industry, garment, construction, tourism, 
and other sectors.  The slowdown is the result of the global 
financial crisis, as well as local political unrest and instability. 
 
 
¶3. (U) The secondary sector has been most affected.  During April 
and May, electricity consumption declined by 55 percent in the 
textile sector and by 20 percent in the chemical industry.  The 
decline continued in June, although at a lower pace (8 percent for 
the textile sector).  Two-thirds of the government's investment 
budget was previously provided by foreign aid; aid cuts following 
the coup of March 17 led to a sharp decrease in construction and 
public works activities.  The union of the companies in this sector 
estimated that their turnover has been reduced by 40 percent.  This 
is also partly due to a decline in construction in the mining 
sector, due to entry into the exploitation phase by QMM. 
 
¶4. (U) The tertiary sector has also been impacted due to a decline 
in transportation and tourism activities.  Despite the beginning of 
the tourism high season, occupancy rates remain low.  Several large 
hotels are planning to fire their employees, following months of 
temporary lay-offs.  Poor performance in the commercial and 
industrial sectors has been partially offset by a bumper rice 
harvest (due to good weather and a strong second season harvest of 
800,000 tons), an increase in logging, the start of ilmenite mining 
by QMM/Rio Tinto in southern Madagascar, and the lifting of the 
gemstone export ban this semester. 
 
Inflation Remains under Control 
------------------------------- 
¶5. (U) In the first half of the year, the Consumer Prince Index 
increased by only 0.93 percent.  This low level of inflation was due 
mainly to the fall in rice prices by 9.4 percent during the harvest 
period which began in February. However, during the first quarter, 
inflation reached 2.25 percent following the lootings of January 
which produced panic among consumers and traders as the ousted 
president's company TIKO, which had a quasi-monopoly on food 
products, lost a large quantity of its stock. 
 
¶6. (U) Combined with the slowdown in economic activities, the 
reduction in credit given by the banking sector helped to control 
inflation.  However, if the depreciation of the currency continues 
during the second semester, prices are expected to increase.  The 
projection of average inflation for 2009 is 9.4 percent (compared to 
9.2 percent in 2008). 
 
Unemployment Continues to Increase 
---------------------------------- 
¶7. (U) Following the lootings in January, 250 companies closed and 
approximately 20,000 employees lost their jobs. An additional 153 
companies, 53 hotels, and 51 free zone companies were obliged to 
temporarily lay-off their employees.  According to the current 
legislation, after several months of lay-offs, the workers must be 
definitively fired. 
 
Government Revenues Shrink 
-------------------------- 
¶8. (U) The slowdown in economic activity and the quasi-paralysis of 
public administration have resulted in a significant decline in 
 
ANTANANARI 00000573  002.2 OF 003 
 
 
domestic tax and customs revenues. During the first semester of 
2009, tax revenue was 28 percent lower than the targets and amounted 
to USD 442.45 million (Ar 828.8 billion).  During the same period in 
2008, tax revenue amounted to USD 769.8 million (Ar 1,315.1 
million).  In local currency terms, the decrease was 37 percent 
compared to the first semester of 2008, owing mainly to the 
reduction in customs revenue (passing from USD 289.2 million to USD 
169.5 million).  However, in June, revenue collection improved due 
to the payment by a number of firms of tax arrears, and an unusually 
high level of oil imports (which accounted for one third of customs 
revenues collected in June). Customs revenues reached 86 percent of 
projections in June, because the power company Jirama imported a 
large quantity of oil.  Because it had stocked up on oil in March 
for fear of shortages due to the political crisis, it did not import 
much oil in April or May, causing a decline in customs revenues for 
those months. 
 
Spending is Cut, but Wages are Still Paid 
-------------------------- 
¶9. (U) The rapid and significant decline in public revenues due to 
the economic slowdown and the decision by many donors to cut aid 
following the March 17 coup d'etat, coupled with the lack of access 
to external financing, led to a severe adjustment of expenditures 
during the first semester.  The cumulative execution rate of the 
overall budget was 20 percent at the end of June 2009, compared to 
35 percent in June 2008.  Most spending (around 80 percent) was 
concentrated on wages, debt repayment, and other priority current 
expenditures.  For salary and wages, the budget execution rate is 
estimated at 27.9 percent for the first semester, whereas for other 
current expenditures and investment expenditure, it was respectively 
27.9 percent and 6.3 percent.  Thus, fiscal adjustment mainly 
impacted public investment. 
 
Wage Payments can be Sustained 
------------------------------ 
¶10. (SBU) The government should be able to continue to pay salaries 
and pensions, which total around USD 26 million (Ar 49 billion) per 
month, going forward.  Debt payments amount to around USD 18.6 
million (Ar 35 billion) per month.  From value added taxes, customs 
duties, and other taxes, the government should be able to collect 
USD 53 million (Ar 100 billion) per month easily, according to the 
IMF.  While this is only 50 percent of original projections of USD 
106.7 million (Ar 200 billion) per month, it is still enough to 
cover salaries and debt payments. 
 
Budget: Roughly Break Even 
------------------------- 
¶11. (SBU) The budget was roughly at a break even point for the first 
half of the year.  The government is operating on a cash basis.  The 
total expenditure figure of USD 359 million (Ar 673 billion) does 
not reflect the expenditures of January/February that were made to 
pay 2008 obligations.  Usually, the government collects the majority 
of its revenues (about two-thirds) during the first semester, but 
does the majority of its spending (about two-thirds) during the 
second semester, so one would expect to see a deficit in the second 
semester.  Education expenses will put pressure on the budget in 
September; about half of the education budget is generally expended 
that month as teachers relocate to their sites.  Also, about 40 
percent of primary school teachers will be affected by the 
suspension of the World Bank program that funded 30 percent of their 
salaries. 
 
Domestic Borrowing is Low 
------------------------ 
¶12. (U) Domestic borrowing was limited during the first half of the 
year.  Treasury bonds auctioned amounted to USD 322.6 million during 
the first semester of 2009, compared to USD 567.8 million in the 
same period in 2008, a decrease of 35 percent.  Despite this 
declining recourse to T-bills, the stock of domestic debt increased 
from USD 332.6 million in January 2009 to 379.5 million in June. 
 
Monetary Policy Seeks to Stimulate Growth 
------------------------ 
¶13. (U) Credit given by the banking sector amounted to USD 40.2 
million during the first semester, compared to USD 126.8 million in 
2008 despite falling interest rates, suggesting a decline in 
economic activities.  To counter this trend, the central bank 
decreased its interest rate by 0.5 percentage points to stimulate 
demand. 
 
Significant Reduction in Trade 
--------------------- 
¶14. (U) Total exports decreased by 46.71 percent in value during the 
first semester of 2009 compared to the same time period in 2008. 
Traditional exports such as vanilla and coffee were 
 
ANTANANARI 00000573  003.2 OF 003 
 
 
disproportionately affected, diminishing more than 90 percent.  The 
shrimp sector also faced declining demand due to the impact of the 
global financial crisis.  Competition from Asian countries with 
lower prices also led to a 56 percent reduction of shrimp exports. 
The textile sector registered a decline of 45 percent due to 
declining demand and for fear of non-satisfaction of the orders by 
Malagasy companies because of insecurity and political instability 
in Madagascar. 
 
¶15. (U) Total imports decreased by 32.2 percent, due mainly to the 
decrease in oil products (57.1 percent of decrease) and inputs for 
the free zone companies (40.4 percent). Furthermore, imports of raw 
materials fell by 29.5 percent, confirming the slowdown in economic 
activities.  However, imports of food and rice increased 
respectively by 33.2 and 34 percent.  This increase was to 
substitute the supply of food that had been provided by the ousted 
president's company TIKO with imports from countries that are not 
traditional suppliers such as Malaysia, South Africa, and 
Mauritius. 
 
Depreciation and Declining Reserves 
---------------------------------- 
¶16. (U) During the first semester, the Ariary depreciated by 4.57 
percent and 3.70 percent respectively against the Euro and the 
Dollar.  In early May, depreciation reached 7.7 percent and 12.79 
percent, but the exchange rate was stabilized during the last two 
months due to the central bank's interventions.  As a result, the 
central bank's foreign reserves decreased from 3.2 months of imports 
in December 2008 to 2.6 months of imports in end-June (passing from 
USD 920.5 million to USD 808.3 million). 
 
Decline in Foreign Investment 
----------------------------- 
¶17. (U) Foreign direct investment declined, passing from USD 257.8 
million during the first semester of 2008 to USD 180.6 million in 
¶2009.  In May, visiting Saudi Arabian investors announced a USD 2 
billion deal, but nothing concrete has resulted from this visit. 
The Ambatovy mining project plans to increase its investment from 
USD 3.4 billion as initially projected to USD 4.5 billion.  If 
disbursed this year, this additional investment would help to 
compensate the balance of payments deficit. 
 
Comment: Future Challenges 
-------------------------- 
¶18. (SBU) The annual food shortage period begins around October. 
Due to extremely low farm gate prices for rice, and the lack of 
incentive programs such as subsidized fertilizer and seed as given 
last year, farmers are not planting much counter-season rice, so 
next year's production will diminish.  Importers are also unwilling 
to import rice for fear of shake-downs by the military.  According 
to the director of the rice observatory, large traders have been 
racketed by the military, so are limiting their stockpiles. 
 
¶19. (SBU) If Madagascar's political leaders can not manage to reach 
consensus, and the country remains isolated, the economic situation 
will continue to deteriorate.   Madagascar risks losing eligibility 
for AGOA trade benefits if progress is not made to return to the 
rule of law, culminating in the potential loss of over 50,000 jobs 
and a reduction in export receipts.  Furthermore, European Union aid 
could be definitively cut in November if the political situation 
does not improve.  Harassment by the transition government also 
threatens to derail the USD 4.5 billion Ambatovy project, which 
would have enormous consequences for not only the Malagasy economy, 
but also the Japanese, Koreans, and Canadians who have invested 
heavily in the project.  End comment. 
 
STROMAYER