Madagascar: Impact of drought and cyclone weaken fiscal position

31 July 2017

Madagascar’s economy will face a number of headwinds, following a severe drought and cyclone that have disrupted agricultural production. A combination of reduced agricultural export earnings and emergency spending related to these twin shocks, will elevate the budget deficit. Damage to crops will also weigh on the global vanilla sector, as prices rise and companies struggle to source supplies.

Security Environment

There is a moderate threat of improvised explosive device (IED) and grenade attacks in the capital Antananarivo, with Madagascar’s fractious political environment the primary driver of attacks. In June 2016, an attack at the Mahamasina stadium during an Independence Day celebration resulted in the deaths of 2 people. Close to the same stadium in January 2014, one person was killed after a grenade exploded, following the inauguration of President Hery Rajaonarimampianina. Foreign nationals are unlikely to be directly targeted in such attacks, however these incidents elevate death and injury risks for individuals in the capital city.

Poverty, power outages, and a rising cost of living will all drive civil unrest ahead of the 2018 presidential election, particularly as citizens are increasingly frustrated with the government’s ability to tackle these issues. Protests are most likely in Antananarivo, Toamasina and Antisrabe. In May 2017, there were student protests at both the University of Antananarivo and the Polytechnic of Vontovorona over fees. In the latter protest, a barricade was set up on a road near the campus and tyres were burnt. Whilst police generally do not use live ammunition against protestors, there will be an elevated risk of collateral property damage during strikes.

Trading Environment

Madagascar’s economy showed some signs of improvement in 2016. Growing textile exports, public investment and strengthened fiscal management under the guidance of a USD42.49 million International Monetary Fund (IMF) Extended Credit Facility arrangement drove economic growth of 4.2%. However, in the next 12-months the economy will face a number of severe headwinds.

A drought in late 2016 and the impact of Cyclone Enawo in March 2017 have significantly affected agricultural production, particularly that of vanilla. These events will have an estimated USD 225 million impact on Madagascar’s balance of payments in 2017. Reduced foreign exchange earnings from vanilla will contribute to a fall in import coverage to 3.3 months in 2017, from 3.9 months in 2016. The destruction of vanilla crops in Madagascar will also create challenging conditions for the global vanilla market, as the country produces around 85% of the world’s crops. Prices have risen to around USD 500 per kilo in early 2017, from USD 100 in 2015.

The twin shocks of drought and cyclone will weigh on Madagascar’s fiscal position. The government has been forced to increase transfers to state utility company JIRAMA in the wake of the drought, as hydropower supply was disrupted. The government expects total transfers to account for 1.3% of GDP, up from a budgeted 0.7%. As a result of this, and other emergency spending, the budget deficit for 2017 has been adjusted upwards by 1.4% of GDP, to 5.9%. However, a sovereign credit default is not expected. Around 80% of Madagascar’s debt is held on concessional terms, mitigating sovereign credit risks.

Investment Environment

During the 2009-2013 political crisis, in which Madagascar was governed by an unelected president with military backing, there was an elevated expropriation risk. During that period, steps were taken to begin the expropriation of a number of oil concessions. In March 2011 Madagascar Oil declared force majeure on a number of its exploration blocks after the government stated that it would expropriate its rights. Whilst these threats were not carried out, they reduced investor confidence in Madagascar. However, since the end of the political crisis in 2013 the risk of expropriation has fallen as the government works to attract foreign investment.

Corruption contributes to a challenging business environment for foreign investors. In July 2014, it was alleged that 40% of the budget was lost to corruption, and firms may be exposed to bribery demands. Corruption also reduces the efficiency of the legal system, making it difficult to have commercial contracts enforced in good time.

Credit. Political and Security Risk update August 2017

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Mongolia, Algeria, Vietnam and Madagascar, all of which have been the subject of recent enquiries from JLT's client base.

Credit. Political, Security Risk update August 2017

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download August Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email


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