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ISSN 1474-5615 Vol 15 Issue 2

February 2010

Southern Africa
Business Monitor Internationals monthly regional report on political risk and macroeconomic prospects

SOuTH afRica

THiS mONTHS TOP STORiES

Four Political Issues To Watch In 2010

BMI View: We believe that four key issues will feature prominently on the South African political scene in 2010: employment policy; the strength of the rand; inflation targeting; and crime especially in light of the 2010 FIFA World Cup. The authorities handling of these issues could determine how much longer President Jacob Zuma can strike a balance between keeping his left-wing allies happy, and convincing investors that economic policy will remain market-friendly.
Amid the economic pain that South Africa is still undergoing, President Jacob Zuma is managing to sustain the difficult balancing act of keeping his left-wing allies on board while following market-friendly policy. Reflecting the relative lack of change in the political backdrop, our political risk ratings remain stable. In our shortterm ratings, South Africa receives a score of 59.2, placing the nation only marginally above Equatorial Guinea (57.1) and suggesting that the risks of instability and civil unrest should not be ignored. In our long-term ratings, South Africa gets a more favourable score of 73.8, placing the nation close to Botswana (70.4) and Mauritius (79.0), indicating that multi-party democracy provides firm structural support for the political environment. Competing Interests President Zuma has made the right noises to the powerful, left-wing Congress of South African Trade Unions (COSATU) and South African Communist Party (SACP). He stated at a COSATU congress held in September 2009 that
...continued on page 2

Zimbabwe: Over-Optimistic On Taxes

BMI View: We believe Finance Minister Tendai Bitis budget presentation to parliament overestimates tax revenues in 2010. As a result, he will be forced to decrease spending on recurrent expenditure. On the positive side, we expect capital expenditure to be covered by foreign assistance and believe the budget to be broadly supportive of increased foreign investment.
page 4

Mozambique: Economy Firing Ahead

BMI View: We have recently revised up Mozambiques real

GDP forecasts for 2009 and 2010 to 5.8% and 6.5% respectively on the back of a stronger-than-anticipated Q309 GDP figure. While the headline number does mask some weaknesses in the economy, overall we believe Mozambique is on track to post solid growth in 2010-2011.
page 10

Botswana: Inflation Lower For Now

page 5

Angola: Eurobond Prospects And Problems

page 6

OiL maRKET OuTLOOK

Zambia

Benchmark Rate An Important Development

BMI View: The introduction of a benchmark interest rate is an important structural development that should help to support the tentative easing of lending rates and support growth. While its initial effectiveness in terms of controlling liquidity and targeting inflation could be limited by the extent of the informal economy and myriad non-demand-related inflationary pressures, it should eventually help deepen the banking sector.
Plans revealed by the Bank of Zambia to introduce a benchmark policy rate in 2010 are very encouraging, even if its initial effectiveness is likely to be limited. Nevertheless as the economy grows and deepens, this development will help bring down rates, which in
...continued on page 7
Source: BMI

After a weak spell, February Brent Crude has edged higher in recent weeks and we continue to target a move to technical resistance around the US$80.00/bbl area. The US$80.00/bbl level will act as significant resistance, although we believe that oil will push higher over the coming weeks. Although inventories as reported by the Energy Information Administration remain high by historical standards, draw downs in recent weeks have seen the oil market tighten slightly, which has been price supportive.
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SOuTH afRica RiSK SummaRY

POLITICAL RISK
...continued from top of front page

Alliance Fracturing?
A war of words between the ruling African National Congresss allies in mid-December sparked fears that the alliance is fracturing. At a party congress, youth leader Julius Malema clashed with South African Communist Party members, accusing them of being greedy yellow communists trying to take over the ANC. Kgalema Motlanthe, who is deputy president of both the ANC and the country, has warned that anyone defying a call for unity from the partys national executive committee will face sanctions and possibly suspension.
Our short-term political risk rating is 59.2.

ECONOMIC RISK

Inflation conundrum
Headline inflation came in at 5.8% y-o-y in November 2009, staying within the central banks 3.0-6.0% target band for the second consecutive month. However, the latest readings have been aided by base effects from 2008 and these will soon wear off, meaning that inflation could move back above the 6.0% upper band in the early months of 2010. Given this outlook, we expect the benchmark interest rate to remain on hold at 7.00% over the first half of 2010, before being hiked by a potential 50 basis points by the end of the year.
Our short-term economic risk rating is 48.8.

BUSINESS ENVIRONMENT

s&P Assessment
In December, ratings agency standard & Poor s affirmed 2009 South Africas BBB+/A-2 foreign currency rating, highlighting moderate although rising debt and stable political institutions as supporting factors. However, S&P retained its negative outlook and commented that South Africa continued to suffer from a high reliance on external portfolio inflows in the context of a significant current account deficit, and severe structural socioeconomic weaknesses. The agency also warned that South Africas rating could be downgraded should it appear that the government is no longer committed to prudent fiscal management.
Our business environment rating is 58.8.

creating jobs and improving the lives of the poor were the policy priorities of the ruling African National Congress (ANC). Zuma commented that the ANC must now use its victory and control of state power to improve the quality of life of the poor and marginalised. Furthermore, his appointment in May 2009 of Ebrahim Patel as Minister of Economic Development has pleased the unions; Patel is a stalwart of the union movement, having previously held a role as General Secretary of the Southern African Clothing and Textile Workers Union. The president has subsequently consolidated the power of Patel, having remodeled his Cabinet cluster system in late October 2009 to include Patel while excluding the Minister of National Planning and former finance minister, Trevor Manuel. At the same time, President Zuma has maintained market-friendly policies, having avoided the temptation to pander to the left with unsustainable spending or subsidies. Although, as mentioned above, Trevor Manuel has been kept outside of the Cabinet cluster system, Manuels proposal for a National Planning Commission has been supported by Zuma. It is intended that the commission will advise the cabinet directly on policy formation. Furthermore, the chairperson of the commission will receive political backing from a Ministerial Committee on Planning, with technical advice from a small, professional National Planning Secretariat. Through these means, Manuel will continue to exert a tangible influence over economic policy a factor which will likely give investors some reassurance, since he is well-respected by the markets and considered a safe pair of hands. The recent Medium Term Budget Policy Statement (MTBPS) given by Finance Minister Pravin Gordhan on October 27, 2009 should also placate investors. Although spending on education and health will be increased, the authorities will not introduce measures they can ill afford in the forthcoming fiscal year, such as a national health insurance system. Despite managing to strike a balance between opposing constituencies, Zuma cannot afford to become complacent. At COSATUs four-day annual conference held in September 2009, the president of the body, Sidumo Dlamini, warned that Zuma and the government should not take the labour federations support for granted when it came to choosing his successor. Dlamini said that when that debate comes we shall

not be neutral we will be on the side with those who have supported the principles that guided our movement, indicating that COSATU may toughen its stance if its demands are not met. The union federation may further exert its authority by encouraging its members to engage in industrial action. South Africa has been blighted by strikes in recent months, with global mining companies which operate in the nation, such as Lonmin, having suffered particularly badly. Against this backdrop, we believe there are four key issues which are contentious and could upset the political balance in 2010: 1. Employment Policy: The governments target to create 4.5 mn work opportunities by 2014 appears to be very ambitious in light of the sluggish economic recovery that South Africa is likely to experience over the coming years. Although the public works minister, Geoff Doidge, commented in November 2009 that nearly 224,000 job opportunities had been created since April 2009, we remain sceptical that the authorities are on track to meet their target. Indeed, the latest data from Statistics South Africas quarterly labour force survey indicates that the official jobless rate increased to 24.5% in Q309 from 23.6% in Q209, with the total number of unemployed people standing at 4.2mn in the three months to September 2009. With unemployment so high, the governments policy on employment will be crucial. The authorities will be reluctant to back-peddle on their ambitious target, but they may choose to gradually lower expectations of job creation in order to avoid losing credibility. Certainly, there has been a recent shift in this direction: Zuma warned on December 3 that due to the continuing impact of the global economic crisis we may still lose more jobs before we turn the corner on job creation. For the time being, however, the authorities appear to be mainly tackling the issue through stressing spending on education and its consequent impact on employability, as illustrated in the MTBPS. 2. The Rand: The South African rand has strengthened by over 30% against the US dollar between March and December 2009, posing a risk to the competitiveness of the export industry, and jobs therein. Accordingly, the rand has moved up the policy agenda over time to become a major bone of contention. Indeed, COSATU has called for the authorities to actively weaken the rand. The governments policy on the rand

sOuThErn AFrIcA FEBRUARY 2010

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has been less than clear. In particular, confusion was caused in October 2009 when Minister of Development Ebrahim Patel said that he planned to freeze the currency at a fixed exchange rate. The markets reacted negatively to the news since such a policy would signal a significant shift from previous free-market ideology, and the rand sold off by over 4.0%. Although Patels comments were swiftly dismissed and the rand recovered its lost ground, there remained some uncertainty over policy. Subsequent statements from the authorities indicate that a change in policy on the rand is unlikely. Comments made in the MTBPS recognised that the strong rand was causing pain for exporters, yet the authorities would continue with their current approach to rand management: Finance Minister Gordhan said that the Treasury will support the ongoing accumulation of foreign exchange reserves by the Reserve Bank, which assists in moderating the appreciation of the rand. 3. Inflation Targeting: The South African Reserve Bank has for some time taken an inflation targeting approach to monetary policy. In other words, the main objective is to keep inflation within an agreed band
DATA & FORECASTS
BMI View: South Africa has technically exited recession, having recorded real GDP growth of 0.9% q-o-q (-2.1% y-o-y) in Q309, following a 2.8% q-o-q contraction in Q209. Nevertheless, we retain our outlook for a sluggish economic recovery.

(3.0-6.0% y-o-y in South Africas case), with concerns such as economic growth and job creation not being explicitly factored into monetary policy decisions. This approach has drawn criticism, especially amid the economic pain experienced in 2009, with COSATU having called for the benchmark repo rate to be slashed to 3.0% from its current 7.0% a move which would lower borrowing costs and thereby boost growth, albeit fuelling inflation. Again, the South African authorities have managed to quieten some of the more radical calls, while still maintaining a market-friendly policy. In the MTBPS, the finance minister said that he welcomed debate on monetary policy, while highlighting that our inflation targeting framework is an important element in macroeconomic co-ordination. It has assisted in lowering inflation expectations, and in preventing inflation from undermining our competitiveness. In our view, the most likely change in policy if there is any change at all is a widening of the inflation target band, so that interest rates will not necessarily be hiked as swiftly as they were over 2007 and 2008. 4. Crime And The World Cup South

Africa has a notorious problem with crime, with around 50 people being killed each day. Data show that between April 2008 and March 2009, violent business robberies rose by 41.5% while house robberies climbed by 27.3%. In addition to the insecurity this creates for citizens and businesses, it is damaging for foreign investment, since there is a significant risk premium attached to setting up operations in South Africa. Encouragingly, the authorities have made fighting crime one of their top priorities, with Zuma having set a target of reducing serious and violent crimes by 7-10% per annum. While this ambitious target bodes well, we have yet to see whether or not it is achievable. The authorities tackling of crime will be especially in the spotlight given that South Africa is hosting the 2010 FIFA World Cup with the football matches set to present considerable security challenges. Indeed, we believe the World Cup could prove to be of great political importance, since a competent staging of events would likely shore up support for the ruling African National Congress party, while an incident-riddled World Cup would undermine the electorates confidence in the authorities.

While our forecast for real GDP growth in 2010 has been notched up to 2.6% from 2.2% on the back of an improved outlook for global demand, this will still be a sub-trend level of growth. In our view, a contraction in private investment and
2008 2009e 49.2 288.3 5,863 -1.8 5.8 25.0 -7.4 6.2 9.9 2.8 7.39 71.5 73.3 -2.0 -15.0 -5.2 39.5 5.3 61,039.3 21.2 72.8 49.4 31.9 -2.1 5.8 7.31 35.1 -

a slow recovery for exports and private consumption, will conspire to keep a lid on growth. Over the longer-term we see annual economic expansion edging up to 3.7% by 2013, before moderating to trend growth of around 3.5%.
Latest Period Q309 Nov-09 5-Jan Sep-09 2010f 49.7 348.6 7,020 2.6 7.5 24.0 -6.0 6.2 10.6 5.4 7.50 87.7 88.3 -1.0 -15.0 -4.4 43.4 4.9 64,091.3 18.4 61.8 47.2 31.9 2011f 50.2 371.7 7,409 2.9 8.8 24.0 -4.7 5.9 11.9 5.9 7.70 96.2 96.8 -1.0 -17.0 -4.5 46.9 4.8 69,218.6 18.6 61.0 47.2 31.9

Population, mn [3] Nominal GDP, US$bn [4] GDP per capita, US$ [4] Real GDP growth, % change y-o-y [4] ZAR nominal growth, % change y-o-y [4] Unemployment, % of labour force, eop [5] Budget balance, % of GDP [1,6] Consumer prices, % y-o-y, eop [7] Lending rate, %, eop [8] Real Lending Rate, %, eop [2,9] Exchange rate ZAR/US$, eop [10] Goods Exports, US$bn [4] Goods imports, US$bn [4] Trade balance, US$bn [4] Current account, US$bn [4] Current account, % of GDP [4] Foreign reserves ex gold, US$bn [11] Import cover, months g&s [12] Total external debt stock, US$mn [4] Total external debt stock, % of GDP [4] Total external debt stock % of XGS [4] Short term debt as a % of International reserves [4] Short term foreign debt, % of total [4]

48.7 276.9 5,688 3.1 14.2 23.0 -1.1 9.5 16.0 4.5 9.44 85.4 89.7 -4.0 -20.0 -7.4 30.6 3.5 71,811.0 25.9 73.3 75.0 31.9

Notes: e BMI estimates. f BMI forecasts. 1 Fiscal Years (April March); 2 Real rate strips out the effects of inflation; Sources: 3 IMF WEO. 4 South African Reserve Bank/BMI Calculations; 5 Statistics South Africa; 6 South African Finance Ministry/South African Reserve Bank/BMI Calculations; 7 Statistics South Africa/BMI Calculations; 8 IMF; 9 IMF/BMI; 10 BMI; 11 IMF IFS/BMI Calculations; 12 IMF IFS/South African Reserve Bank/BMI Calculations.

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FEBRUARY 2010 sOuThErn AFrIcA

ZimbabwE
ECONOMIC OUTLOOK

RiSK SummaRY
POLITICAL RISK

security Forces To remain under ZAnu-PF control

President Robert Mugabe has stated that he and his party, ZANU-PF will resist any moves , to reform the security services. Speaking at ZANU-PFs five-yearly party congress, Mugabe said that defence of our sovereignty rests with us [ZANU-PF] and with no other. Control of the security forces has been a contentious issue in the coalition government formed with the MDC at the beginning of 2009 and has been crucial to the ageing leaders ability to sustain his leadership of the country.
Our short-term political risk rating is 29.6.

Over-Optimistic On Taxes
BMI View: We believe Finance Minister Tendai Bitis budget presentation to parliament overestimates tax revenues in 2010. As a result he will be forced to decrease spending on recurrent expenditure. On the positive side, we expect capital expenditure to be covered by foreign assistance and believe the budget to be broadly supportive of increased foreign investment.
The level of tax revenue that Finance Minister Tendai Biti anticipates is overly optimistic in our view. In his presentation to parliament, Biti said he expects tax receipts of US$1.4bn, equivalent to 29.0% of nominal GDP. Looking to Zimbabwes neighbours, average tax collections as a percentage of GDP in 20012007 ranged from 12.2% in Mozambique to 22.4% in Botswana. We believe the target of 29.0% is not achievable. Rather, we think that tax collections will be in the 19-20% region, equating to US$1.1bn in revenue. In addition to taxes, the government is budgeting a further US$810mn. The presentation stated that US$210mn would be drawn down from the US$510mn allocated by the IMF as part of the institutions external shock facility. There was little detail, however, on where the balance would come from. Indeed, western countries will not give the Zimbabwean government direct budget support, but will rather provide humanitarian assistance to fund developmental projects. Therefore we believe that the balance of US$600mn for capital expenditure will come from foreign sources but is unlikely to be channelled through the government (making its inclusion in the budget questionable). The money will
DATA & FORECASTS
BMI View: We expect Zimbabwe to see a widening trade deficit over the forecast period as growth in imports, necessary for the refurbishment and expansion of domestic industrial capacity, outpaces the growth in exports. Our optimistic real GDP growth forecast for Zimbabwe in 2010 of 15.2% is based largely on growth in private investment which will drive the demand for imports.
2007 Population, mn [6] Nominal GDP, US$bn [1,7] GDP per capita, US$ [8] Real GDP growth, % change y-o-y [8] Budget balance, % of GDP [2,8] Consumer prices, % y-o-y, eop [3,6] Lending rate, %, eop [6] Real Lending Rate, %, eop [4,9] Exchange rate ZWD/US$, eop [5,10] Goods exports, US$bn [7] Goods imports, US$bn [7] Trade balance, US$bn [7] Current account, % of GDP [8] Foreign reserves ex gold, US$bn [6] Total external debt stock, % of GDP [11] 2008 2009e 12.7 3.2 249 4.6 -3.8 -6.0 4,500.0 4,506.0 1.5 2.6 -1.1 -15.0 0.0 212.6 2010f 12.9 3.6 280 15.2 -3.6 4.0 100.0 96.0 1.6 3.0 -1.4 -462.0 0.0 188.7 2011f 13.1 4.3 328 14.6 -3.2 4.0 35.0 31.0 1.9 3.5 -1.5 -2.1 0.3 162.9

ECONOMIC RISK

Monthly Inflation Turns negative In november

Headline inflation returned to negative territory in November in month-on month terms, coming in at -0.1% down from a 0.8% m-o-m increase in October. Hyperinflation, which was brought to end at the end of 2008, has meant that the Central Statistics Office (CSO) has not released y-o-y figures during 2009. The first y-o-y figures are expected in January 2010. BMI estimates consumer prices to have fallen by 6.0% from January-December 2009, as greater competition from goods being available in formal outlets has pushed prices lower.
Our short-term economic risk rating is 15.8.

go towards the types of projects for which the authorities are budgeting. Resources for recurrent expenditure, however, look less forthcoming. Tax revenue of US$1.1bn, combined with US$210mn from the IMF, leaves the government with US$1.31bn while the budget allocates US$1.6bn to recurrent expenditure. Given that the authorities are operating a cash budget, this will entail a cut in recurrent expenditure plans meaning civil servants will not see a significant pay rise in 2010 and basic government services will remain poor. This being said, our positive growth outlook for Zimbabwe in 2010 is based upon strong investment and private consumption growth. We see the governments major role in the recovery as providing a political environment which will attract foreign investment and lead to the resumption of relations with the international community. The budget contributes to the former by reducing corporate tax to 25% and stating that local currency will not be reintroduced in the foreseeable future. Additionally, the authorities plan to cut fees on stock market transactions from 7.5% currently to 3.5% in 2010, reducing one of the barriers to foreign capital funding flowing in.

BUSINESS ENVIRONMENT

TelOne Investment Talks

South Africas fixed-line incumbent Telkom is reportedly in discussions to acquire a 60% stake in Zimbabwean operator TelOne, according to local news source ZimOnline. A TelOne spokesperson, confirmed that the state-owned operator was in discussions with a foreign company, but did not elaborate. Current legislation limits foreign ownership in TelOne to 49% but there have been indications from the government that Zimbabwe is open to discussion on the legislation. Zimbabwes crumbling wireline network infrastructure is in dire need of investment, and with TelOne struggling for cash and the state coffers rather bare, outside investment would be hugely beneficial.
Our business environment rating is 36.1.

12.4 12.5 3.6 3.2 285 255 -6.9 -14.1 -28.0 -39.6 35,000.0 5,000,000,000.0 775.0 4,500.0 -34,225.0 -4,999,995,500.0 30,000.00 500,000,000.00 1.8 1.7 2.1 2.6 -0.3 -1.0 -303.4 -19.0 0.0 0.0 148.7 189.5

Notes: e BMI estimates. f BMI forecasts.; 2 IMF figures are used for 2007 & 2008; 3 From 2009 on, inflation is expressed in US dollar terms, as foreign currency became the widely used legal tender in that year; Sources: 6 IMF. 7 Central Statistical Office/IMF; 8 Central Statistical Office/IMF/BMI; 9 IMF/BMI; 10 BMI; 11 World Bank/BMI

sOuThErn AFrIcA FEBRUARY 2010

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bOTSwaNa
ECONOMIC OUTLOOK

Inflation Lower For Now

BMI View: Lower headline inflation in November allowed the Bank of Botswana to make an aggressive 100 basis point cut to its benchmark lending rate. We believe that inflation is likely to start heading higher in 2010 and thus see the bank beginning to raise rates from the second half of 2010.
Headline inflation declined to 5.0% y-o-y in November (down from 6.9% in October), moving within the Bank of Botswanas (BoB) target band of 3-6% for only the second time in more than decade. The decline prompted the bank to make an aggressive 100 basis point cut to its benchmark lending rate to 10.00%, meaning that the current easing cycle, which began in December 2008, has seen the rate fall by 450 bps. The statement accompanying the latest cut said that prospects for the level of inflation being sustained within the 3-6% objective target range during 2010 remain good. We are not so sure. The decline in inflation is partly attributed to the fact that the alcohol levy, introduced 12 months ago, has now fallen out of the inflation calculation. However, this component carries only a 9.2% weighting in the price basket. Of greater importance will be the impact of higher oil prices in 2010 on the transport component, which constitutes 19.0% of the basket. Indeed, BMIs oil and gas team is forecasting Brent Crude oil to
DATA & FORECASTS
BMI View: Botswanas international reserves stood at US$9.2bn in October 2009 which represents 22 months of import cover, according to BMIs estimate for 2009 imports. We believe that reserves will remain at around the US$9.0bn mark in 2010 before gradually increasing over the remainder of the forecast period.
2007 Population, mn [2] Nominal GDP, US$bn [3] GDP per capita, US$ [4] Real GDP growth, % change y-o-y [3] BWP nominal growth, % change y-o-y [4] Budget balance, % of GDP [4] Consumer prices, % y-o-y, eop [5] Lending rate, %, eop [6] Real Lending Rate, %, eop [1,6] Exchange rate BWP/US$, eop [4] Goods exports, US$bn [3] Goods imports, US$bn [3] Trade balance, US$bn [3] Current account, % of GDP [4] Foreign reserves ex gold, US$bn [3] Import cover, months g&s [3] Total external debt stock, US$mn [2] Total external debt stock, % of GDP [4] Total external debt stock % of XGS [4] Short term debt as a % of International reserves [4] Short term foreign debt, % of total [4] 1.9 12.3 6,507 4.4 15.3 10.1 8.2 16.0 7.8 6.02 5.0 3.4 1.6 14.6 9.8 25.7 390.0 3.2 6.6 0.3 7.7 2008 1.9 13.4 7,005 2.9 20.4 4.2 13.7 16.5 2.8 7.60 4.7 4.5 0.2 5.6 9.1 18.2 365.0 2.7 6.5 0.3 6.8 2009e 1.9 13.9 7,154 -6.5 3.4 -6.6 6.3 12.5 6.2 5.95 2.9 3.7 -0.8 -2.6 9.0 22.0 1,852.0 13.3 52.6 0.2 1.2 2010f 2.0 18.3 9,291 5.0 16.6 -12.4 4.7 13.0 8.3 6.04 4.0 4.5 -0.4 -0.4 9.0 18.2 1,858.0 10.1 38.9 0.3 1.5 2011f 2.0 20.4 10,189 7.1 13.6 -6.8 6.1 13.5 7.4 6.20 4.5 4.7 -0.2 0.2 9.2 17.4 1,807.2 8.8 34.0 0.2 1.3

RiSK SummaRY
POLITICAL RISK

Fiscal Pressures Increase

The Ministry for Minerals, Energy and Water Resources has said that Botswana is compelled to take up its share of De Beers proposed rights issue. Shareholders agreed to make a US$1bn equity investment in the firm in order to allow it to reduce its debt pile. The Botswanan governments share of this will amount to about US$150mn, placing further pressure on the authorities already stretched finances. BMI estimates that the budget deficit will reach 14.7% of GDP in the 2009/10 fiscal year.
Our short-term political risk rating is 77.3.

average US$85.00/bbl in 2010, about 40% higher than 2009s average of US$61.00 bbl. Given the alcohol levy was set at 30%, the upward pressure from higher oil prices is likely to more than offset the exclusion of the levy. We therefore see inflation moving to the upper limit of the target band and beyond in 2010, likely prompting the BoB to tighten monetary policy from H210. Risks To Outlook The risks to our outlook are balanced. A more robust global economic recovery than we currently envisage would stimulate growth (via demand for diamonds) and would place further upward pressure on prices. This would lead to the central bank beginning the tightening cycle earlier than H210. Conversely, a sluggish global revival would weigh on Botswanan growth but would also mitigate the threat of rising inflation. In this instance we could see the BoB keeping rates at the current levels for the whole of 2010 or even making further cuts in an attempt to support the economy.

ECONOMIC RISK

Q-o-Q Growth In Q3
Figures released by the Central Statistics Office (CSO) show that real GDP contracted by 3.6% y-o-y in Q309 although this figure represents a 3.6% expansion in quarter-onquarter terms. The q-o-q growth was driven by private and government consumption while net exports continued to create a drag. BMI is estimating that the economy contracted by 6.5% in real terms in 2009, and will return to growth in 2010 with a 5.0% real expansion. Over the longer term, sustainable economic growth will be dependent on the countrys ability to diversify away from diamonds.
Our short-term economic risk rating is 58.8.

BUSINESS ENVIRONMENT

Tourism Legislation Passed

The Botswana Tourism Organisation Bill has been presented to parliament in a bid to streamline regulation of the tourism industry. The bill proposes the formation of the Botswana Tourism Organisation (BTO) which will be tasked with the selection and development of tourism projects in the country. Additionally, the bill includes a requirement that all tourist facilities have a minimum one-star grading within 12 months of commencement of operations. Tourism is one of the industries the authorities have identified for development in the bid to wean the Botswanan economy off its dependence on the diamond industry.
Our business environment rating is 48.3.

Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank, BMI. 3 BoB, BMI; 4 BMI; 5 CSO, BMI; 6 IMF, BMI.

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FEBRUARY 2010 sOuThErn AFrIcA

aNgOLa
ECONOMIC OUTLOOK

RiSK SummaRY
POLITICAL RISK

Fraudulent Transfers
According to Angolas Attorney General, Joo Maria de Sousa, over 90% of the US$100mn in fraudulent overseas payments executed by the finance ministry has been recovered. Although he provided few details about the case since it is still in the investigation phase, de Sousa revealed that the recovery of the funds was made possible with the help of Banco Nacional de Angola (BNA), which, through international channels, had managed to block the payments and return the money home. The most recent scandal is but one visible example of Angolas longstanding problems with political corruption.
Our short-term political risk rating is 69.0.

Eurobond: Prospects And Problems

BMI View: While Angolas external debt profile is on a par with that of its Sub Saharan African counterparts, we see a number of structural impediments that are likely to raise the required rate of return on its forthcoming Eurobond issue.
After months of mulling the possibility of a eurobond sale, Angolan authorities confirmed in November that the country would turn to the international market for US$4.0bn in funding. On the surface, the decision is not unusual: improving credit conditions have emboldened a number of African countries to make a return to international capital markets, while the demand for dollar-denominated assets from Sub-Saharan Africa is still thought to be well in excess of available supply. However, Angolas decision to wade into international debt markets without first acquiring a credit rating from the major agencies is a decidedly unusual, and possibly risky, move. BMIs proprietary sovereign ratings indicate that there are considerable risks involved when buying Angolan debt: we place the nation 11th of 19 rated Sub-Saharan African nations. There are also a number of structural issues likely to raise concerns. The most important among these is Angolas dependence on oil, both for
DATA & FORECASTS
After an abrupt slowdown in 2009 as a result of the collapse in international oil prices, we expect Angola to experience a V-shaped recovery in 2010, with growth forecast at 8.0% y-o-y. As in past years, the primary drivers of growth will be private consumption and investment, as well as government expenditure. Over the coming five years (2010 included), we foresee an average growth rate of 8.1%, making Angola one of the most rapidly expanding economies in Sub-Saharan Africa.
2007 Population, mn [2] Nominal GDP, US$bn [3] GDP per capita, US$ [4] Real GDP growth, % change y-o-y [5] AOA nominal growth, % change y-o-y [5] Budget balance, % of GDP [6] Consumer prices, % y-o-y, eop [7] Lending rate, %, eop [2] Exchange rate AOA/US$, eop [9] Goods exports, US$bn [2] Goods imports, US$bn [2] Trade balance, US$bn [2] Current account, % of GDP [8] Foreign reserves ex gold, US$bn [7] Import cover, months g&s [10] Total external debt stock, % of GDP [12] Short term foreign debt, % of total [12] 17.6 60.9 3,465 19.8 28.6 1.7 11.8 14.8 75.02 44.4 13.7 30.7 15.5 11.2 5.1 15.8 16.0 2008 18.0 93.4 5,185 14.8 49.6 9.0 13.2 9.3 74.98 64.7 19.8 44.9 24.1 17.5 6.3 10.4 16.0 2009e 18.5 77.2 4,168 0.1 -13.2 -8.0 13.1 16.0 83.50 39.3 19.4 19.9 6.1 12.8 4.9 15.2 16.0 2010f 19.0 105.0 5,514 8.0 41.5 -2.7 12.0 14.0 80.00 56.0 21.0 35.1 17.3 14.0 5.1 12.2 16.0 2011f 19.6 128.1 6,548 6.9 17.5 -2.6 12.0 14.0 77.40 60.0 23.1 36.9 15.3 16.8 5.7 9.3 16.0

ECONOMIC RISK

still Breaking OPEc Quota

Following OPECs extraordinary meeting in Luanda in December, Angolan oil minister and outgoing OPEC President Jos Botelho de Vasconcelos confirmed that his countrys output continued to exceed the limit specified by its quota. Although OPEC does not publish production quotas for individual countries, Angolas targeted level of output has been variously estimated at 1.52-1.66mn b/d, compared with actual production of around 1.8-1.9mn b/d. However, Vasconcelos confirmed that there was an understanding within OPEC regarding Angola, which is deemed to need the oil revenue for vital reconstruction projects.
Our short-term economic risk rating has been lowered to 58.5 on account of greater exchange rate volatility and a worsening fiscal position.

government receipts and as the primary earner of foreign exchange. Although our medium-term outlook for the oil sector is generally sanguine, many of Angolas oil fields are now reaching maturity, meaning that production is likely to peak sometime around 2015 (assuming no new discoveries are made). Alongside this trend, we expect imports to rise continuously over the forecast period, leading to a gradual decline in Angolas trade and current account surpluses. Second, with the gradual deterioration of Angolas trade position, questions about its management of the exchange rate are also likely to come to the fore. At present, the Banco Nacional de Angola (BNA) operates a managed peg to the US dollar, with forex demand met only to the extent that reserves are in adequate supply. Although the bank has had some success in closing the gap between the official and parallel exchange rates of late, the inherent vulnerability of this system was exposed by the collapse of oil prices in late 2008 and early 2009.

BUSINESS ENVIRONMENT

Foreign Banks Break In

According to a recent statement by standard Bank, the groups Angolan unit will have a capital of US$50mn. Having received its banking license in November, standard Bank de Angola, as it will be known, said that it will aim to provide a full range of services including corporate and investment banking by mid2010. Standards decision to enter Angola is part of wider strategy among South African banks to break into neighbouring markets. However, the dominant position of existing local and Portuguese banks means that scope for further investment in Angola is limited.
Our business environment rating is 20.7.

Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 IMF. 3 African Development Bank; 4 African Development Bank/IMF/BMI; 5 African Development Bank/BMI; 6 Angolan Ministry of Finance/BMI; 7 Banco Nacional de Angola; 8 IMF/BMI; 9 BMI; 10 Banco Nacional de Angola/IMF/BMI; 11 World Bank GDF; 12 World Bank GDF/BMI.

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Zambia
...continued from bottom of front page

late 2009 had begun to show signs of falling. This should ease lending conditions and support growth, but we note that the Banks temptation to keep rates low could fuel existing inflationary pressures. Inflation in Zambia may have belatedly begun to decelerate faster in H209, but, despite Novembers inflation reading of 11.5% year-on-year (y-o-y) being the lowest since May 2008, inflation remains stubbornly in the double digits. We believe CPI will have ended 2009 at 10.0%, but could accelerate again to 14.5% by end-2010. Easing Price Pressures Look Temporary Despite a one-month up-tick in August as state-owned power company ZESCO initiated its first round of tariff hikes, consumer price growth in Zambia has decelerated since December 2008. November inflation came in at 11.5% y-o-y, the lowest in 18 months and the fifth month-on-month fall since May. Most categories continue to show elevated rates of price growth, but the strong deceleration in the largest components food and transport and communications have helped bring down the headline reading. Regarding food prices the heaviest weighting in the overall index at 57.1% strong harvests have led the price deceleration from 21.3% y-o-y in January 2009 to 11.1% y-o-y by November. The bumper 2009 harvest increased food supply, obviating the need for imports. If yields do not continue to impress, pressures will return. As for energy-driven sub-indices, the picDATA & FORECASTS

ture has improved even more. Despite what would have normally been favourable base effects due to the peak in global oil prices in Q2-Q308, the transport and communications sub-index had slowed to an 11-month low of only 10.4% y-o-y in August 2009. In October, this plummeted to -3.2% y-o-y. Given the slow feed-through, the global oil price recovery over 2009 and into 2010, this deflationary period is likely to be temporary. Energy prices are already reeling from the electricity tariffs hikes of 40% in August 2009 and 26% planned for March 2011. Much slower private sector credit growth has also helped ease price pressures, but even here, the impact will be short-lived, and we expect lending/borrowing to recover. The worst fears have proved overblown as the government saved the mining sector, and by extension lots of peripheral businesses dependent on it. With the mining sector set to grow further in 2010 as investment continues, employment and incomes should be supported. Not only will economic growth continue to accelerate into 2010, but a number of commercial banks announced plans to slash lending rates by December 2009 to around 21% from 24% in November. More importantly, the Bank of Zambia has revealed plans to move from an open market system with the introduction of a fixed benchmark interest rate in 2010. Building on the introduction of an overnight lending facility at the start of December, this will allow the BoZ to provide liquidity to the market and bring down commercial lending rates.

RiSK SummaRY
POLITICAL RISK

rupiahs Position ropey

There are signs that President Rupiah Banda is feeling increasingly insecure in his position as both head of the ruling Movement for Democratic Change (MMD) and of the country. A government official announced on January 3 that Gabriel Namulambe had been removed from his position as minister of science, technology and vocational training with immediate effect. The sacking follows accusations by Namulambe, who is from the same tribe as the late president Levy Mwanawasa, that Banda is abandoning the legacy of the late leader by sidelining politicians sharing Mwanawasas regional background.
Zambia scores 65.0 in our short-term political risk rating.

ECONOMIC RISK

Looking sweet
Zambias largest sugar producer Zambia sugar,owned by South Africa-based sugar producer Illovo sugar,plans to double its annual sugar exports to the EU to 200,000 tonnes over 3-4 years, company spokesperson Lovemore Sievu has said. The expansion of the companys Mazabuka sugar plant helped it to raise sugar exports in 2009 to 100,000 tonnes per year, up from about 30,000 tonnes. Sievu said the company plans further expansion of the plants production capacity to 465,000 tonnes in 2-3 years, up from the existing capacity of 450,000 tonnes.
Our short-term economic risk rating stands at 45.4.

BMI View: With mining output having ridden out the 2008/09 external storm to support growth in 2009, the outlook for Zambia in 2010 looks to be even more positive. We see the economy expanding in the region of 7.9%, supported by an encouraging investment picture and a recovery in domestic spending.
2007 Population, mn [4] Nominal GDP, US$bn [5] GDP per capita, US$ [5] Real GDP growth, % change y-o-y [6] Budget balance, % of GDP [1,7] Consumer prices, % y-o-y, eop [8] Lending rate, %, eop [4] Exchange rate ZMK/US$, eop [4] Goods exports, US$bn [4] Goods imports, US$bn [4] Trade balance, US$bn [4] Current account, % of GDP [7] Foreign reserves ex gold, US$bn [4] Import cover, months g&s [3,7] 12.2 11.7 961 6.2 -1.3 8.9 18.9 3,830.00 4.6 3.6 1.0 -6.7 1.1 2.9 2008 12.5 14.8 1,185 6.0 -1.5 16.6 19.1 4,785.00 5.1 5.0 0.0 -8.7 1.1 2.4 2009e 12.9 13.6 1,054 5.5 -3.7 9.9 18.0 4,400.00 4.3 4.0 0.3 -7.5 1.9 4.7 2010f 13.3 17.7 1,334 7.9 -3.0 14.5 17.0 4,200.00 6.4 5.0 1.4 -5.3 2.0 3.9 2011f 13.6 21.2 1,554 8.3 -1.5 11.0 16.0 4,100.00 7.4 5.8 1.6 -5.4 2.2 3.6

BUSINESS ENVIRONMENT

second Oil round

Zambia launched in December 2009 a second oil licensing round, only a month and a half after the conclusion of the first one. With a deadline of June 2010, the round covers 23 blocks in six of the countrys nine provinces, of which 12 which did not receive first-round bids. After the repeated delays to the first round, holding a second so soon demonstrates the governments eagerness to accelerate exploration. It remains to be seen, however, whether the new blocks on offer will attract interest from the more established foreign oil companies, whose presence will ultimately be crucial for the development of Zambias oil and gas industry.
Zambias business environment rating is 44.2.

Notes: e BMI estimates. f BMI forecasts. 1 Central Government; 2 Global assumptions correct when forecasts generated.; 3 Goods imports only.; Sources: 4 IMF. 5 IMF/Zambia Central Statistical Office/BMI calculation; 6 IMF/Zambia Central Statistical Office; 7 IMF/BMI calculation; 8 Zambia Central Statistical Office; 9 OPEC.

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mauRiTiuS
ECONOMIC OUTLOOK

RiSK SummaRY
POLITICAL RISK

restrictions On Bangladeshi Labour

The Mauritian government has imposed mandatory health checks for Bangladeshi expatriate labourers, to be conducted before workers are granted permission to enter the island nation. The policy was introduced following a report from the World Health Organisation which stated that Bangladesh has one of the highest rates of tuberculosis infection among its adult population in the world. BMI believes that the move is also in part related to rising Mauritian unemployment, which the government expects hit 7.7% in 2009, up from 7.2% in 2008.
Our short-term political risk rating is 82.7.

Rates To Stay Low Until End 2010

BMI View: Low inflation and lack of certainty of economic revival mean we see the Central Bank of Mauritius keeping rates at their historic lows of 5.75% with tightening pencilled in to begin at the end of 2010.
We believe that the combination of an uncertain growth outlook and low inflation mean that the Mauritian central bank will allow for the 250 basis points (bp) of cuts made between October 2008 and March 2009 to feed through before beginning to tighten monetary policy in late 2010. Risks are slightly tilted to the downside with an outside chance of one further cut to ensure the economic revival. The possibility of an earlier start to the tightening process than we are currently envisage is remoter still, but not beyond the realm of possibility. The decision by the Central Bank of Mauritius to hold benchmark interest rates at 5.75% at the December 10 monetary policy meeting was in line with our (and market) expectations. Dependence on the global economy in terms of its tourism, textile and sugar industries means that the island nation has not been spared by the slowdown. While the Mauritian treasury forecasts the economy to grow by 4.3% in 2010 after real expansion of 2.8% in 2009, the uncertainties surrounding the global recovery mean that this forecast is not assured and is susceptible to a second global downturn. Furthermore,
DATA & FORECASTS

ECONOMIC RISK

csO Forecasts 4.3% Growth In 2010

The Mauritian Central Statistics Office (CSO) has said that it expects the economy to expand by 4.3% in 2010, based on a revival in tourism and strong growth in the construction sector. BMIs own real growth forecast stands at 3.5% for the year. Our less optimistic view is based on the fact that we believe a tepid global recovery will see tourism remain weak relative to historic levels. This will be exacerbated by a strong Mauritian rupee which we see trading at MUR28.00/US$ by the end of 2010.
Our short-term economic risk rating is 59.4.

while the treasurys forecast is higher than BMIs forecast of 3.5%, it is below the average 5.0% real expansion seen in 20002008 period. In addition to the uncertainty around Mauritiuss growth rebound, inflation remains at historically low levels. After peaking at 11.7% y-o-y in August 2008, the headline figure has fallen to 0.7% y-o-y in November 2009. While we believe that this has bottomed and will begin to tick up over the course of 2010, we think that this will remain at manageable levels with it forecast to average 3.0% y-o-y over the course of the year. With these two factors in mind, we believe that the central bank will not begin raising interest rates from their historic lows until at least the second half of 2010. The risks to this outlook are tilted slightly to the downside in that if the recovery is seen to falter, the central bank may make one further cut of 50 basis points. Conversely a stronger economic recovery on the back of a more robust global rebound than we anticipate would likely be accompanied by higher inflation and could see the central bank begin tightening earlier.

BUSINESS ENVIRONMENT

health Industry Development

The head of the Healthcare and Life Sciences section of the Mauritian Board of Investment, Mr Nitin Pandea, has invited Indian pharmaceutical and healthcare companies to invest in the island nation. Pandea said that his country was looking to take advantage of the Indian healthcare industrys growing power to attract medical tourists. Mauritius currently receives less than 4,000 foreign patients per annum but aims to increase this to 10,000 in coming years, targeting African citizens in particular. Mr Pandea also said the Board of Investment is keen to develop areas of drug development and clinical trials.
Our business environment rating is 64.6.

BMI View: We are currently forecasting the Mauritian rupee to end 2010 at MUR28.00/US$ based on a narrowing current account deficit. The risks to this forecast are tilted to the downside and take stem from the threat of central bank intervention which may step in to weaken the unit in a bid to support exports.
2007 Population, mn [1] Nominal GDP, US$bn [2] GDP per capita, US$ [2] Real GDP growth, % change y-o-y [1] Budget balance, % of GDP [1] Consumer prices, % y-o-y, eop [1] Lending rate, %, eop [3] Real Lending Rate, %, eop [2] Exchange rate MUR/US$, eop [1] Goods exports, US$bn [1] Goods imports, US$bn [1] Trade balance, US$bn [1] Current account, % of GDP [2] Foreign reserves ex gold, US$bn [1] Import cover, months g&s [2] 1.3 7.6 6,027 5.4 -3.0 9.2 21.9 11.8 28.40 2.2 3.7 -1.4 -5.7 1.8 4.8 2008 1.3 9.4 7,425 5.3 -3.4 8.0 21.0 10.2 31.50 2.3 4.3 -2.0 -10.5 2.1 5.2 2009e 1.3 8.7 6,812 2.4 -5.8 2.1 16.8 14.4 29.00 2.0 3.7 -1.7 -8.3 2.2 6.4 2010f 1.3 10.4 8,092 3.5 -6.3 4.0 16.8 12.3 28.00 2.1 4.0 -1.9 -6.3 2.4 6.7 2011f 1.3 12.0 9,218 5.6 -5.0 5.0 17.0 11.4 27.00 2.2 4.2 -2.0 -4.5 2.6 6.5

Notes: e BMI estimates. f BMI forecasts. Sources: 1 IMF. 2 IMF/BMI calculation; 3 IMR.

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maDagaScaR
POLITICAL OUTLOOK

Risks Mounting As Power-Sharing Crumbles

BMI View: Madagascar is at serious risk of further political upheaval, as indicated by a recent downgrade to its short-term political risk rating. Parliamentary elections scheduled for March 2010 could prove a flashpoint for civil unrest, if they go ahead.
December 2009 saw a deterioration in the political environment in Madagascar, as reflected in a downgrade to our proprietary political risk ratings. With the outlook very uncertain, we assign the nation a score of just 31.7 out of 100.0 for short-term political risk, and see Madagascar in peril of instability over the coming months. Indeed, the score of 31.7 places the country only marginally ahead of Zimbabwe (29.6) and Guinea (31.3) in terms of political risk. Prior to Decembers events, things had been looking more promising in the aftermath of the mid-March coup. A powersharing deal had been struck between the nations political protagonists in November 2009, following months of stalled negotiations. Importantly, President Andry Rajoelina who had previously pioneered the unconstitutional seizure of power in March 2009 had agreed to the deal, in a move that won him international recognition as president. Early optimism was soon quashed, howDATA & FORECASTS
BMI View: Given the worsening political outlook, we have lowered our real GDP growth forecast for 2010 to -0.6% from 1.6% previously. Divestment and declining exports look likely, given the deterioration in security and Americas recent suspension of preferential trading rights.
2007 Population, mn [2] Nominal GDP, US$bn [2] GDP per capita, US$ [2] Real GDP growth, % change y-o-y [2] Budget balance, MGAbn [3] Budget balance, % of GDP [4] Consumer prices, % y-o-y, ave [5] Consumer prices, % y-o-y, eop [5] Lending rate, %, eop [2] Real Lending Rate, %, eop [6] Exchange rate MGA/US$, ave [2] Exchange rate MGA/US$, eop [2] Goods Exports, US$bn [2] Goods imports, US$bn [2] Trade balance, US$bn [2] Current account, US$bn [2] Current account, % of GDP [6] Foreign reserves ex gold, US$bn [2] Import cover, months g&s [6] 19.7 7.4 377 6.2 -368.9 -2.7 10.4 8.1 45.0 31.3 1,866.93 1,782.00 1.1 1.9 -0.8 -0.9 -12.3 0.8 3.8 2008 20.2 9.6 476 7.7 -277.7 -1.7 9.2 10.1 30.0 19.0 1,693.63 1,823.00 1.2 2.2 -1.0 -1.1 -11.2 1.0 3.9 2009e 20.7 8.8 427 -2.0 -920.3 -5.3 8.9 7.9 25.0 14.7 1,963.06 2,000.00 1.1 2.1 -1.0 -1.1 -12.2 0.8 3.5 2010f 21.3 9.7 457 -0.6 -969.4 -5.1 9.6 10.0 25.0 14.1 1,952.38 1,904.76 1.1 2.2 -1.1 -1.1 -11.8 0.8 3.5 2011f 21.8 11.4 523 1.4 -1,002.2 -4.8 9.0 8.0 25.0 14.7 1,842.46 1,780.15 1.2 2.3 -1.1 -1.2 -10.8 0.9 3.4

RiSK SummaRY
POLITICAL RISK

civil unrest
Protests erupted in Madagascar in midDecember, sparked by the breakdown in negotiations held between the countrys political elite. Opposition leaders and hundreds of their supporters gathered outside parliament. In response, the security forces fired teargas into the crowds, dispersing them swiftly. We expect similar scenes to unfold over the coming months, as indicated by the low score we assign Madagascar in our short-term political risk ratings.
Our short-term political risk rating is 31.7.

ever, as the power sharing deal fell apart. In mid-December, Rajoelina rejected the peace accords he had previously signed up to, scrapped the posts of two co-presidents, and unilaterally appointed an army colonel as his new prime minister. Furthermore, he announced that Madagascar will hold a parliamentary election on March 20, 2010. If the poll goes ahead, it could prove a flashpoint for civil unrest, and any results will likely lack legitimacy owing to shortcomings in transparency and election monitoring. With the opposition leaders attempting to set up a parallel administration in the meantime, the political outlook is very uncertain. Indeed, we see a strong risk that neither government will be recognised by either the Malagasy populace or the international community, meaning a prolonged period of political stagnation. Against this backdrop, it seems likely that things may get worse before they get better. Frequent episodes of civil unrest, especially in the capital, are on the cards over the coming months.

ECONOMIC RISK

AGOA Off
US President Barack Obama announced on December 23, that he had terminated trade benefits for Madagascar, in addition to Guinea and Niger. In a statement, he commented that the three countries had failed to make continual progress in meeting US requirements for the African Growth and Opportunity Act, which grants preferential access to US markets. This bodes ill for Madagascars exports to the US, since the suspension from AGOA will likely leave the nations products such as textiles uncompetitively priced.
Our short-term economic risk rating is 37.5.

BUSINESS ENVIRONMENT

Investors Deterred
The business environment remains blighted by the unstable political backdrop in Madagascar. Indeed, multinational companies such as oil giant Exxon Mobil have suspended their activities while awaiting a stable, legitimate government. Furthermore, inflows of foreign direct investment slowed dramatically in 2009, according to government officials. Given the latest deterioration in political risk, we expect investors to continue to shy away from the Indian Ocean nation, at least over the first half of 2010.
Our business environment rating is 39.1.

Notes: e BMI estimates. f BMI forecasts. 1 Global assumptions correct when forecasts generated.; Sources: 2 IMF. 3 Ministry of Economy, Finance and Budget; 4 Ministry of Economy, Finance and Budget/BMI calculation; 5 Central Bank of Madagascar; 6 IMF/BMI calculation; 7 OPEC.

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mOZambiQuE RiSK SummaRY

POLITICAL RISK ECONOMIC OUTLOOK

renamo A sore Loser

Opposition party Renamo has refused to accept the result of the Presidential and Parliamentary elections that were held on October 27, in which incumbent President Armando Guebuza secured re-election. However, the Constitutional Council claimed that Renamo had not provided sufficient evidence to support its claims that electoral fraud had taken place. Given the strong mandate secured by Guebuza (around 75% of the vote), and the business friendly nature of the administration, we see little risk that Renamos claims will pose a threat to the political stability of the current administration or to ongoing economic reforms.
Our short-term political risk rating remains steady at 66.9 this month.

Economy Firing Ahead

BMI View: We have recently revised up Mozambiques real GDP forecasts for 2009 and 2010 to 5.8% and 6.5% respectively on the back of a stronger-thananticipated Q309 GDP figure. While the headline number does mask some weaknesses in the economy, overall we believe Mozambique is on track to post solid growth in 2010-2011.
Statistics released by the Banco Central de Mocambique (BCM) show the economy expanded by 6.4% y-o-y in Q309. On a quarter-on-quarter basis, the economy grew 3.2% from Q209, which had already been a strong quarter for the economy. On the back of this robust outturn, we upwardly revised our growth forecasts for 2009 and 2010 to 5.8% and 6.5% respectively from 4.7% and 5.5% previously. Although we have revised up Mozambiques headline growth figure, a breakdown of GDP shows that the public sector expanded rapidly, as did the financial sector, which helped conceal some of the weakness in other sectors of the economy. Indeed, according to Q309 data, the agricultural sector which accounts for about a third of GDP expanded by 9.6% y-o-y. While this was a good showing, it was below the average of 12.5% registered in the past six quarters. Although the public sector is a small contributor to growth, public administration expanded by 13.9% y-o-y in Q309 up from 7.6% in Q308, contributing 0.5pp to growth (up from 0.2pp in Q308). This largely reDATA & FORECASTS
BMI View: The metical seems to have found a base around the MZN31.00/US$ area, in line with the view we promoted last month. Going forward, we expect a moderate appreciation of the currency in line with the countrys improving macroeconomic outlook. Indeed, a more benign inflationary environment should also reduce the risk perception of the country. We see a steady appreciation of the metical and maintain our end-10 target at MZN25.00/US$, supported by foreign direct investment into the resource sectors of the economy, and donor support.
2006 Population, mn [3] Nominal GDP, US$bn [3] GDP per capita, US$ [4] Real GDP growth, % change y-o-y [5] Budget balance, % of GDP [1,4] Consumer prices, % y-o-y, eop [6] Lending rate, %, eop [3] Exchange rate MZM/US$, eop [3] Goods Exports, US$bn [5] Goods imports, US$bn [5] Trade balance, US$bn [5] Current account, % of GDP [4] Foreign reserves ex gold, US$bn [3] Import cover, months g&s [7] 20.1 7.0 348 8.7 -1.0 8.1 20.3 25.96 2.4 2.6 -0.3 -8.6 1.2 4.1 2007 20.5 8.1 395 7.0 -2.1 12.1 18.9 23.50 2.4 2.8 -0.4 -7.8 1.4 4.7 2008 21.0 10.6 506 6.8 -2.1 11.8 18.0 25.10 2.6 3.5 -0.8 -8.1 1.6 4.3 2009e 21.5 10.5 490 5.8 -5.0 1.0 15.5 28.00 2.7 3.6 -0.9 -7.0 1.7 4.5 2010f 21.9 11.6 530 6.5 -4.1 6.5 14.5 25.00 3.0 3.9 -0.9 -6.7 1.9 4.5

ECONOMIC RISK

Benign Inflation Environment

According to the Mozambiques National Statistics Agency (INE), consumer price inflation came in at 0.8% y-o-y in October and was largely on the back of marginally higher food prices. Inflation in the capital, Maputo, came in slightly higher at 1.4% y-o-y in the month, and edged higher still in November with an inflation reading of 2.5% y-o-y. We believe that the low inflation readings will give the central bank the opportunity to anchor inflation and inflation expectations, which will bode well for growth.
Our short-term economic rating is stable at 60.0.

flects the stimulus measures that have been implemented throughout the year, and is also mirrored in the countrys fiscal accounts, which saw a 37% y-o-y deterioration in the governments fiscal deficit through to Q309. Similarly, financial services, which typically account for a very small part of the economy given the relatively shallow banking sector, saw their contribution to growth increase substantially in Q309. Financial services have historically accounted for about 5.0% of the economy, normally contributing around 4.0pp to the headline growth figure. However, in Q309, this sector accounted for approximately 5.5% of GDP and contributed a startling 0.9pp to growth. This too reflects the rapid credit growth in the economy in recent months. While some weaknesses remain, the expansion of credit should feed its way through the economy and help support private consumption and investment going forward, which will positive for growth. Given these dynamics, we reiterate our view that Mozambique is on a solid footing to post strong growth in 2010 and 2011.

BUSINESS ENVIRONMENT

Thumbs up From The IMF

According to the IMF, Mozambique showed unexpected resilience during the global economic downturn, and met most of the quantitative targets set for H109 under the one-year Exogenous Shocks Facility. This will allow it to start unwinding the fiscal and monetary policy measures which have been in place in order to prevent the economy from slowing too dramatically. The business environment should benefit from these measures as there will be less crowding out of the private sector. Furthermore, the government should not have to raise taxes too aggressively, as the fiscal accounts should also start to improve.
Mozambiques business environment score is unchanged at 38.8 out of 100.

Notes: e BMI estimates. f BMI forecasts. 1 fiscal balance including grants; 2 Global assumptions correct when forecasts generated.; Sources: 3 IMF. 4 Mozambique authorities/IMF/BMI calculation; 5 Mozambique authorities/IMF; 6 INE; 7 IMF/ BMI calculation; 8 OPEC.

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Namibia
ECONOMIC OUTLOOK

Easing Cycle Ends On Inflationary Concerns

BMI View: The Bank of Namibia (BoN) kept key interest rates on hold in October, signalling an end to its expansionary monetary policy and highlighting inflationary concerns.
In line with our expectations, the BoN held its repo rate steady at 7.00% in its October 2009 policy meeting, signalling that its aggressive easing cycle during which interest rates were slashed by 350bps between December 2008 and June 2009 has finally ended. We expect interest rates to remain at 7.00% going into 2010, before they begin to rise again in the second half of the year (in line with South African rates). Throughout Q309, we have seen price growth across nearly all indicators remain stagnant at relatively low y-o-y levels. For example, the index for Food and Non Alcoholic Beverages in October 2009 increased 7.8% y-o-y, compared with 7.2% in the previous month. Inflation fell to an annual low of 7.1% y-o-y in September 2009, from 7.6% in August and a 2009 peak of 11.6% in January. CPI remained steady at 7.1% through October, well below the 12.0% recorded over the same year-ago period. Nevertheless, the Transport component showed a considerable increase during this time, which feeds into our view that rising
DATA & FORECASTS
BMI View: In line with our cautiously optimistic view on the Sub-Saharan African region in 2010 not to mention the global economy as a whole we believe that economic growth in Namibia bottomed out in 2009 and is now showing promising signs of recovery. Although private consumption remains weak, the recovery will be aided by increasingly favourable external conditions. We expect real GDP growth to accelerate from an estimated -0.7% in 2009 to 3.1% in 2010.
2006 Population, mn [2] Nominal GDP, US$bn [3] GDP per capita, US$ [3] Real GDP growth, % change y-o-y [3] NAD nominal growth, % change y-o-y [4] Unemployment, % of labour force, eop [5] Budget balance, % of GDP [4] Consumer prices, % y-o-y, eop [7] Lending rate, %, eop [2] Exchange rate NAD/US$, eop [4] Goods exports, US$bn [4] Goods imports, US$bn [3] Trade balance, US$bn [3] Current account, % of GDP [4] Foreign reserves ex gold, US$bn [3] Import cover, months g&s [4] 2.1 8.7 4,228 4.1 13.8 31.7 -22.2 7.1 13.6 6.81 2.9 3.1 0.0 9.2 0.9 0.0 2007 2.1 8.6 4,113 2.7 15.0 31.3 -19.9 10.9 13.7 9.37 3.1 3.8 -1.0 4.0 1.3 0.0 2008 2.1 8.0 3,794 -0.7 -5.5 31.0 -34.5 7.2 7.6 7.39 3.0 3.8 -1.0 -0.1 1.8 0.0 2009e 2.1 10.9 5,150 3.1 21.6 30.6 -36.0 5.5 8.3 7.50 3.9 4.7 -1.0 4.8 2.0 0.0 2010f 2.1 12.3 5,741 3.3 14.8 30.4 -34.2 6.0 9.6 7.70 4.7 5.0 0.0 7.5 2.8 0.0

RiSK SummaRY
POLITICAL RISK

Opposition Parties contest Election result

In line with unanimously held expectations, the ruling SWAPO party scored a landslide victory in the November presidential and parliamentary elections. Although three African observer missions declared the poll to be peaceful, transparent and fair, local observers and opposition parties criticised the delay in releasing results, in addition to some alleged counting irregularities. In response to the complaints levelled by opposition parties, local courts have ordered the release of electoral materials including rejected ballots and reports from polling stations. Even if these parties managed to obtain a recount, we would still expect SWAPO to be confirmed the winner by a wide margin.
Our short-term political risk rating is 67.1.

oil prices will likely play a significant role in keeping CPI levels up in 2010. Indeed, with oil expected to rise to an average of US$85.00/bbl in 2010, the transport index is expected to have greater influence over the headline inflation figure. Given the overall direction of price pressures, we expect CPI growth to be well contained within the 5.0-6.0% range over the coming months. Indeed, even though consumption pressures will be marginally higher in 2010, we agree with central bank authorities that they will have only a minimal effect on price growth, and will more likely than not be drowned out by the high base of the H109 consumer price index. Accordingly, while we have tweaked our average 2009 inflation rate forecast only marginally (from 9.1% to 9.0%) to reflect latest data, CPI growth in 2010 is now expected to drop to an annual average of 6.0%, rather than 7.0%. From there on out, we expect the central bank to begin to gradually pull the reins on its monetary policy with rates peaking at 8.5% in 2012 in an effort to stabilise prices.

ECONOMIC RISK

External Position Improving

An unexpectedly rapid recovery in Namibias mining sector and improved external demand conditions will have positive, longlasting effects on the countrys external trade position, in our view. Due to an expected bump in tourism in 2010 combined with revisions to past data, we have been led to make substantial changes to our forecasts regarding the size of Namibias current account for 2010 and beyond. The most dramatic of these changes can be seen in our estimate for the 2009 deficit, which has now been revised down to US$6mn from US$861mn previously (i.e. 0.1% of GDP from 11.6%).
Our short-term economic risk rating has been raised to 42.9 (from 41.3) on account of an improving external position.

BUSINESS ENVIRONMENT

First cement Factory

The European Investment Bank has granted a loan of EUR82mn (US$122.2mn) to support the construction and operation of the first cement factory in Namibia. With a capacity of 700,000 tonnes per year, the factory will be owned and operated by local company Ohorongo cement. Its production is expected to boost economic activity by providing jobs at both the construction and operation stage.
Our business environment rating is 59.6.

Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 IMF. 3 BoN, BMI; 4 BMI; 5 IFS; 6 IMF/BMI; 7 NPC/Central Bureau of Statistics,BMI.

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FEBRUARY 2010 sOuThErn AFrIcA

11

LESOTHO
ECONOMIC OUTLOOK

RiSK SummaRY
POLITICAL RISK

Fiscal Deficit In 2009

The Ministry of Education and Training has signed a Memorandum of Understanding (MOU) with Microsoft in a bid to ensure greater use of information technology in the countrys schools. The MOU will see Microsoft assist with the development of teachers IT skills as well as supporting infrastructure at education institutions. Insufficient resources have prevented the government from providing adequate facilities for the countrys students, leading to a high drop-out rate from primary and secondary schools. Given the authorities limited resources, external assistance is necessary to address this.
Our short-term political risk rating is 68.1.

Moderate Inflation Increase

BMI View: Inflation is likely to be nearing a bottom at 4.2% y-o-y for October, and price growth is set to tick higher. We think, however, that the increase in inflation will be moderate and that there is little likelihood that prices will spiral out of control.
We believe that the 4.2% y-o-y headline inflation figure recorded in October is close to the bottom of the cycle and while we may see one or two more months of disinflation (year-onyear) moving into the end of 2009, headline price growth rate will start to increase in 2010. That said, we do not believe that the headline number will move significantly higher and the threat of high inflation is remote. For the year, we forecast the headline number to average 5.3% in year-on-year terms. The food component of the basket, which comprises 39.8%, led the decline in the headline figure, coming in at 3.9% y-o-y, while the non-food component grew by 4.7%. Headline inflation is likely to start moving higher from this point for two reasons. Firstly, the Lesotho economy is inextricably linked to that of South Africa, with the loti being pegged to the rand and almost all imports coming from its neighbour. If we assume that prices move in line with those in South Africa, simple mathematics will mean that the Lesotho headline figure will trend higher in 2010 due to base effects. Secondly, remittances from Basotho workers in South Africa form are an important driver of consumer demand. With
DATA & FORECASTS
BMI View: Lesothos international reserve position stood at US$1.06bn at the end of 2009, which represents about 6.6 months of import cover according to BMIs estimation of 2009 imports. The central bank has a net international reserve target of US$550mn which it deems the minimum amount necessary to maintain the lotis peg to the rand.
2007 Population, mn [1] Nominal GDP, US$bn [2] GDP per capita, US$ [2] Real GDP growth, % change y-o-y [2] Unemployment, % of labour force, eop [3] Budget balance, % of GDP [1] Consumer prices, % y-o-y, eop [4] Lending rate, %, eop [5] Exchange rate LSL/US$, eop [3] Goods exports, US$bn [2] Goods imports, US$bn [2] Trade balance, US$bn [2] Current account, % of GDP [2] Foreign reserves ex gold, US$bn [1] Import cover, months g&s [2] 2.4 1.6 661 5.1 21.9 5.0 10.5 14.1 6.70 0.8 1.5 -0.8 12.6 0.76 6.0 2008 2.5 1.5 619 3.5 21.9 -1.1 10.6 16.3 9.44 0.9 1.8 -0.8 14.1 0.10 6.8 2009e 2.5 1.5 596 -5.4 21.9 -1.2 4.5 12.1 7.39 1.0 1.9 -0.9 -13.6 0.11 6.6 2010f 2.5 1.9 730 4.1 21.9 -0.1 6.2 12.6 7.50 1.2 2.2 -1.0 -13.8 0.11 6.0 2011f 2.6 2.0 785 4.8 21.9 -0.3 6.5 13.5 7.70 1.3 2.3 -1.0 -11.2 1.00 5.2

ECONOMIC RISK

Fiscal Deficit In 2009

According to data in the central banks latest monetary policy statement, the government budget surplus was equivalent to 18.8% of GDP in Q209. However this swung to a deficit of 20.0% of GDP in Q309. The large swing was explained by the fact that the government was unable to make payments in Q2 due to functionality problems with its payments system, obligations that were subsequently fulfilled in Q3. Overall, we expect the government to run a budget deficit of 1.2% of GDP in 2009 following a decrease in receipts from the Southern African Customs Union.
Our short-term economic risk rating is 38.1.

the South African economy forecast to return to growth in 2010 (albeit muted), we expect remittances and by extension, domestic demand in Lesotho to increase. This will place upward pressure on prices. While we believe that prices are likely to tick higher in 2010, we do not think that rampant inflation is on the cards. Indeed, our forecast is for the end-of-period figure to hit 6.2% y-o-y and the headline figure to average 5.3% over the course of the year. This is due to the fairly benign inflation outlook in South Africa combined with the fact that the Lesotho central bank holds sufficient reserves (US$1.1bn or six months of import cover) to maintain the currency peg in the medium term. Risks To Outlook The risks to our outlook are tilted to the upside and stem from the outlook for oil prices and Lesothos foreign reserve position. If global oil prices increase more than we are currently anticipating in 2010, this would push inflation higher. Secondly, while the international reserve position is satisfactory for the time being, a draw-down could see pressure for a currency devaluation, which would lead to higher imported inflation.

BUSINESS ENVIRONMENT

us$500mn To Fight AIDs

The US government has pledged about US$500mn to help fight the HIV/AIDS crisis in Lesotho. The money will be allocated to the renovating and upgrading infrastructure such as hospitals and health centres, as well as to the development of human resources necessary to fight the disease. With as much as 23% of the adult population estimated to be HIV-positive (second globally, only to Swaziland which has a prevalence rate of 26%), combating the disease is one of the Lesotho governments most pressing priorities.
Our business environment rating is 39.8.

Notes: e BMI estimates. f BMI forecasts. Sources: 1 OEF. 2 OEF/BMI; 3 IMF/BMI; 4 WEO; 5 IFS/BMI.

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