Cape Verde: An African success story in an economy dependent on the outside world – Standard & Poor’s

6 April 2009

New York, USA, 6 April – Cape Verde is “an African success story,” above all for the stability and running of its institutions, though also an economy very dependent on the outside world which means it will suffer from the current crisis, according to Standard & Poor’s.

“Cape Verde’s political institutions and its stability are among the strongest in Africa and form a good foundation upon which to face the challenges of the economy’s imbalances. The authorities have been strong and consistent in carrying out economic reform, which has contributed to robust economic expansion over the last few years,” said the international credit rating agency in its most recent report on the archipelago, published March.

The report points out that over the last three years, average annual economic growth has been six percent, double the rate forecast for the next few years, though state and tax accounts tend to be more “volatile” given the “the small and not very diversified nature” of the economy.

Levels of wealth, a measure of the capacity to absorb external shocks, are considered “relatively high,” with a “per capita” GDP in the region of US$3,485.

Stability and “high human development indicators,” as well as monetary “consistency,” related to the local currency’s indexation to the Euro, as well as the improvement in tax management, all contributed to the rating given to Cape Verde’s debt (B+ with the prospect of stability)

On a negative note, S&P highlights the “great external imbalances,” which in part “reflect the narrowness of the economy,” and also the high level of indebtedness.

The country, it points out, “depends on imports for its basic needs, such as food and petroleum, the prices of which have risen over recent years. Exports are limited and the rapid growth of tourism projects (…) has driven an increase in imports.”

The overall balance of payments position is “sustainable” thanks to large volumes of Foreign Direct Investment (FDI) and money from Cape Verdean emigrants.

“However, as the global economy slows down, the risk increases that these sources of revenue could waver, creating pressure on the balance of payment,” it adds.

Despite “significant progress in the reduction of the national debt,” in 2009, government debt should stand at about 61 percent of the GDP, compared to an average of 36 percent for similar countries.

Cape Verde is therefore “highly vulnerable to external shocks,” though in a context of improvement in economic prospects and good economic management.

At a corporate level, and even with government support, the country is poorly classified on the World Bank’s list of economies, namely due to the rigidity of its labour market.

As well as this, the authorities have come up against the challenges of “combating crime and unemployment” (18 percent in 2007) and, at an economic level, of reducing poverty and creating opportunities for the population.

In the future, it is expected that the government will continue to improve the management of public finances. (…) As the global economic slowdown deepens, the need to improve the country’s economic competitiveness will be fundamental. This will include reducing the rigidity of the labour market, characterized by big salaries and recruitment and redundancy difficulties,” said S&P.

Opportunities for the archipelago come in the form of joining the World Trade Organization, and partnership with the European Union, important stimuli for the economy, and also the creation in Cape Verde of one of China’s free trade zones in Africa, which the rating agency considers to be a given.

“Cape Verde is one of six countries on the African continent to host a Chinese free trade zone, where Chinese companies will store their goods before distribution throughout the continent. It is known that negotiations continued in 2008. The concretization of these projects could have a positive impact on the future growth of the country,” it said. (macauhub)