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ISSN 1474-5615 Instant access to the latest issue on the day of publication via pdf download, as well as access to pdfs of back issues. Access to the latest stories, analysis, charts, graphs and data online 24 hours a day, from any location. Search across a 3-year archive of stories by keyword, sector or country. Find what you want when you want. Don t know your password? Contact Esther Lopez at elopez@businessmonitor.com or call +44 (0)20 7248 0468 today. Not a subscriber? Go to www.meamonitor.com today, register your details and get instant trial access. Visit www.meamonitor.com ISSN: 1472-1805 for the following subscriber benefits: Vol 16 Issue 2 February 2011 Southern Africa Business Monitor International s monthly regional report on political risk and macroeconomic prospects ZAMBIA SOUTH AFRICA THIS MONTH S TOP STORIES OIL MARKET OUTLOOK Consumer Sector To Drive Growth In 2011 BMI View: We expect the South African economy to continue its tepid recovery in 2011, with our forecast for real GDP growth standing at 3.5%. The continued rebound of the consumer sector will be a key driver, but headline growth will likely be reined in by rising imports.

The South African economy continued its subdued recovery in Q310, growing by 2.6% quarter on quarter (q-o-q) on a seasonally adjusted and annualised basis (SAA). Although the growth rate was marginally lower than the 2.8% q-o-q SAA of Q210, the breakdown of GDP by expenditure reveals consumer spending continues to show signs of life, boosted by the low interest rate environment, ongoing wage increases and rising asset prices. Nevertheless, the overall picture for the South African economy is one of only moderate growth. In light of the Q310 data, we have adjusted our estimate for economic expansion in 2010 to 2.8% from 3.0%. Looking ahead, we forecast annual economic expansion of 3.5% in 2011 followed by an average of 4.2% over 2012-2015. Focusing first on the key consumer sector, we are encouraged to see that private consumption rose by 5.9% q-o-q SAA in Q310, up from 4.9% in Q210. Two key factors have been driving growth and look set to continue supporting spending in 2011: accommodative monetary policy and

significant wage increases. On the former, the South African Reserve Bank has cut the benchmark interest rate by a cumulative 650 basis points Constitutional Shake-Ups Won t Rock The Boat? BMI View: On balance, the recent realignment of party loyalties in the leadup to the 2011 presidential elections in Zambia will strengthen the status quo, as opposition forces inability to challenge the MMD becomes more apparent. While some constitutional changes have been enacted, many of the most anticipated reforms, including those dealing with election reform, will not be adopted before the elections. BMI believes that the recent realignments of political parties in Zambia underscore the difficulty of establishing a unified opposition. The Patriotic Front (PF), the leading opposition party, has expressed its dismay over the formation of a new political party called Africa s Democratic and Economic Development Organization (ADEDO)Front-month Brent Crude surged higher in December, lifted by improving risk appetite and Energy Information Administration data showing that crude inventories have been declining since late October. Oil prices should remain well-correlated to equities and we are generally bullish, in line with our positive view on the commodity complex. Continued gains above US$90/bbl could be difficult to sustain, though, as the market remains oversupplied on a historical basis. On the whole, we note balanced risks to our average forecast of US$82.00/bbl in 2011 and US$88.00/bbl in 2012.

Source: BMI Zimbabwe: Political Scenarios For 2011 BMI View: We maintain our view that elections will take place in 2011, and the success of these will hinge on whether a constitution is adopted prior to the polls taking place. page 4 Angola: Cracks Showing Below Mantle Of Authority BMI View: Although we still expect President Dos Santos party to win elections scheduled for 2012, and to do so easily, there are a growing number of signs that he is becoming nervous about the outcome. page 6 Mauritius: Inflationary Pressures Building page 8 Madagascar: New Constitution No GameChanger page 9 Rising Commodity Prices: Implications For SSA page 12 continued on page 7... continued on page 2...2 2 SOuthern AFrICA (bps) since December 2008 to 5.50%; the last move was a 50bps cut in November 2010. This has substantially lowered borrowing costs for consumers, boosting spending. The latest data reveal that durable goods sales are FEBRUARY 2011 www.meamonitor.com

notably ticking up. On the second point, South Africa s strongly unionised workforce has been bargaining hard over much of 2010. Some wage increases have topped 10.0%, far above inflation the latest print for CPI is 3.6% year-on-year (y-o-y) in November. Again, this is feeding through to higher spending, despite the high levels of household debt and unemployment (25.3% in Q310). With both low interest rates and substantial wage increases set to boost spending in 2011, we forecast private consumption will increase by 3.3% y-o-y in 2011, adding 2.1 percentage points (pp) to headline growth. Turning to private investment, the picture is a little discouraging. Investment grew by just 0.2% q-o-q SAA in Q310, down from 0.3% in Q210. This pace of expansion is notably slower than prefinancial crisis levels of 2-5%, and while World Cup-related spending may have raised the figures over recent years, we are still concerned over the outlook for investment. Moving forward, investor sentiment towards South Africa has weakened after the long-running spate of industrial action coupled with high unemployment and rising political risk. We expect private investment

to grow by 2.5% y-o-y in 2011, adding just 0.5pp to headline growth. It is worth mentioning that we expect South Africa to continue attracting large volumes of hot money portfolio inflows. The portfolio inflows stem from the wall of liquidity associated with QE2 in the US flooding towards high-yielding emerging markets. While this is helping to support the balance of payments, we are mindful of the risks this poses to financial stability as the money can flow out just as quickly as it came in. The South African treasury announced on December 13 that impending changes to exchange controls will be brought in shortly presumably aimed at weakening the rand by allowing increased funds to flow overseas. The limit for retirement funds has been raised to 25% from 20%, while the limit for mutual funds has been increased to 35% from 30%. However, this will not have a notable impact on the rand, in our view, given that funds do not exceed the limits currently in place. Returning to the balance of payments picture, we highlight that the current account deteriorated in Q310, with the deficit widening to 3.0% of GDP from 2.5% in Q210. The main driver of this trend is an

increase in imports: in Q310, imports grew by 5.7% q-o-q SAA, substantially faster than the 2.4% growth rate seen in Q210. This is unsurprising given the ongoing strength of the rand, which is making imports more competitive although the recovery in private consumption is also boosting demand for imports. We see imports growing by 4.0% y-o-y in real terms in 2011, shaving 1.2pp off headline growth. Exports also grew in Q310, but at a slower pace than the previous quarter: 3.3% q-o-q SAA compared with 4.2% in Q210. We anticipate that exports will continue to post decent growth in 2011, boosted by strong demand from fast-growing emerging markets, especially China. We forecast real growth of 4.5% y-o-y in 2011, adding 1.1pp to headline growth. Risks To Outlook The biggest risk to our outlook stems from China. Our Asia analysts forecast belowconsensus real GDP growth of 7.5% in 2011, but risks are both to the upside and the downside, with significant implications for South Africa. If the Chinese economy sustains its recent speedy growth (and, in our view, overheating), we may revise up our forecasts for South African export growth,

given that China is a leading export destination. Less positively, if the slowdown in China turns out to be more marked than we currently anticipate, South Africa would feel the pain through reduced export revenues. 2007 2008 2009 2010e 2011f 2012f 2013f 2014f Nominal GDP, ZARbn [1] 1,999.1 2,283.8 2,424.2 2,631.0 2,830.1 3,103.9 3,418.3 3,771.4 Nominal GDP, US$bn [1] 282.3 276.9 289.3 360.4 425.6 485.0 545.3 607.6 Real GDP growth, % change y-o-y [1] 5.6 3.6 -1.7 2.8 3.5 4.0 4.2 4.2 GDP per capita, US$ [1] 5,900 5,688 5,884 7,257 8,484 9,573 10,656 11,757 Population, mn [2] 47.9 48.7 49.2 49.7 50.2 50.7 51.2 51.7 Unemployment, % of labour force, eop [3] 23.6 21.9 24.3 25.2 24.0 22.0 20.0 19.4 Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Reserve Bank/BMI Calculations. 2 World Bank/BMI calculation/BMI; 3 Statistics South Africa. SOUTH AFRICA RISK SUMMARY POLITICAL RISK Political temperature rising As we have highlighted in the past, the political temperature in South Africa has heated up in recent months. In particular, we draw attention to the possibility that the incumbent government could face renewed industrial unrest and anger among poorer citizens over inadequate public services, propelling demands for more public spending that could worry investors. Furthermore, President Jacob Zuma is coming under scrutiny in light of the series of mining scandals involving companies with close family ties to

the president. Our short-term political risk rating is 59.8. ECONOMIC RISK Competitive Industry BMI s Food & Drink analysts highlight the competitive nature of industry in South Africa. Across food, drink, retail and entertainment sectors, there are plenty of companies in competition with one another. However, up until fairly recently most companies focused largely on the middle class. This is beginning to change as the consumer facing sectors look to bring down prices to tap into new growth segments domestically, with an example being the aggressive steps being taken by the organised retail industry to target many of the hitherto largely neglected townships. Our short-term economic risk rating is 48.8. BUSINESS ENVIRONMENT Land reforms Pose risks BMI sees downside risks across South African agricultural production over the medium term, as policy uncertainty over potential land reforms could drive some farmers out of the country and deter private investment in the sector. The land reforms, first discussed in the mid-1990s and most recently in a government issued white paper, are intended to create a more equitable issue of land

ownership by addressing the injustices of racially based land dispossession of the past . Although the possible re-distribution system could be a political winner, the continued policy uncertainty could discourage private investment into the sector. Our business environment rating is 54.7. continued from top of front page...www.meamonitor.com FEBRUARY 2011 SOuthern AFrICA 3 DATA & FORECASTS BMI View: Monetary policy will remain abnormally loose in the US, with the Federal Open Market Committee planning to purchase an additional US$600bn of longer -term Treasury securities by the end of Q211. The associated wall of liquidity will likely flow towards high-yielding emerging markets with strong growth trajectories. South Africa will be the main beneficiary in SSA, thanks to the carry on offer with the repo rate likely to remain at 5.50% through 2011 as well as the relatively deep and liquid financial markets. ECONOMIC OUTLOOK Is The Interest Rate Easing Cycle Over? BMI View: The South African Reserve Bank s 50bps rate cut to 5.50% on November 18 2010 likely marks the end of the easing cycle, although a further cut in early 2011 cannot be ruled out. The next decision will hinge on the strength of the incipient

recovery in domestic demand. In line with our expectations, the South African Reserve Bank (SARB) cut the repo rate by 50bps on November 18, taking the benchmark lending rate to 5.50%. This means the central bank has now enacted a cumulative 650bps of interest rate easing since the cycle began in December 2008. SARB attributed the decision to two main factors: a lowering of its inflation forecasts and a still-fragile recovery in domestic demand. Governor Gill Marcus commented that the outlook for domestic inflation has improved against the backdrop of a continued negative domestic output gap and sustained strength in the exchange rate of the rand . SARB predicts that inflation will average 4.3% in 2010 and 2011, before accelerating to 4.8% in 2012. Clearly, inflationary pressures are relatively benign, with inflation set to remain comfortably within the SARB s 3-6% targeted range, and this gave the central bank room for manouevre with rates. Turning to the economic recovery, Marcus highlighted weakness in the supply side of the economy . The latest macroeconomic data from South Africa paint a picture of a tepid recovery. The

manufacturing sector in particular has been hit by industrial action, with manufacturing output rising by just 1.4% y-o-y in September, following 5.3% growth in August. Domestic difficulties are being compounded by the relative strength of the rand, with consequent negative implications for the competitiveness of exports. On this note, the latest rate cut was likely driven in part by a bid to reduce carry on South African assets. With the yield slightly reduced although still attractive portfolio inflows may be dampened a little, alleviating some of the appreciatory pressure on the rand. Nevertheless, we retain our expectation that the rand will continue strengthening against the US dollar over the coming months, driven by still-strong capital inflows stemming from QE2 in the US. Looking ahead, our core scenario is for the repo rate to remain at 5.50% for an extended period, as the central bank has given one final shot in the arm to the economy and with domestic demand in the recovery mode, further cuts may not be deemed necessary. That said, we acknowledge the risk that there may be one more cut in early 2011. Marcus commented that the November rate cut may not be the bottom of the interest

rate cutting cycle. This being the case, we will be watching the high-frequency data (retail sales, manufacturing output, credit growth, etc) closely for signs that domestic demand is failing to bounce back as expected. 2008 2009 2010 2011 2012 Population, mn [4] 48.7 49.2 49.7 50.2 50.7 Nominal GDP, US$bn [5] 276.9 289.3 360.8 428.8 485.0 GDP per capita, US$ [5] 5,688 5,884 7,265 8,548 9,573 Real GDP growth, % change y-o-y [5] 3.6 -1.7 2.8 3.5 4.0 ZAR nominal growth, % change y-o-y [5] 14.2 6.2 8.5 7.6 9.7 Unemployment, % of labour force, eop [6] 21.9 24.3 25.2 24.0 22.0 Budget balance, ZARbn [1,7] -26.9 -165.6 -140.5 -128.7 -113.5 Budget balance, % of GDP [1,7] -1.2 -6.8 -5.3 -4.5 -3.7 Consumer prices, % y-o-y, ave [6] 11.5 7.2 4.3 4.0 5.6 Consumer prices, % y-o-y, eop [6] 9.5 6.3 3.5 5.5 5.7 Lending rate, %, eop [8] 15.0 10.5 7.8 7.7 9.0 Real lending rate, %, eop [2,9] 5.5 4.2 4.2 2.2 3.3 Exchange rate ZAR/US$, ave [10] 8.25 8.38 7.29 6.60 6.40 Exchange rate ZAR/US$, eop [10] 9.44 7.39 6.70 6.50 6.30 Exchange rate ZAR/EUR, eop [10] 13.22 9.39 9.05 8.65 7.88 Goods exports, US$bn [5] 85.4 66.4 84.2 102.7 121.9 Goods exports, % change y-o-y [5] 13.3 -22.2 26.8 22.0 18.7 Goods imports, US$bn [5] 89.7 66.1 83.6 103.4 123.7 Goods imports, % change y-o-y [5] 10.6 -26.3 26.4 23.7 19.6 Balance of trade in goods, US$bn [5] -4.3 0.3 0.6 -0.8 -1.9

Current account, US$bn [5] -19.6 -11.5 -12.8 -17.3 -20.4 Current account, % of GDP [5] -7.1 -4.0 -3.5 -4.0 -4.2 Foreign reserves ex gold, US$bn [3,11] 33.5 39.0 42.9 46.3 48.6 Import cover, months g&s [3,5] 3.8 5.8 5.0 4.4 3.9 Total external debt stock, US$mn [5] 71,811.0 61,039.3 64,091.3 69,218.6 76,140.5 Total external debt stock, % of GDP [5] 25.9 21.1 17.8 16.1 15.7 Total external debt stock % of XGS [5] 73.2 77.8 64.0 56.8 52.7 Short term debt as a % of International reserves [5] 68.6 50.0 47.8 47.8 50.0 Short term foreign debt, % of total [5] 31.9 31.9 31.9 31.9 31.9 Notes: e BMI estimates. f BMI forecasts. 1 Fiscal Years (April March); 2 Real rate strips out the effects of inflation; 3 International liquidity position of SARB, inc gold; Sources: 4 World Bank/BMI calculation/BMI. 5 South African Reserve Bank/BMI Calculations; 6 Statistics South Africa; 7 South African Finance Ministry/South African Reserve Bank/BMI Calculations; 8 IMF; 9 IMF/BMI; 10 BMI; 11 South African Reserve Bank.4 4 SOuthern AFrICA www.meamonitor.com ZIMBABwE RISK SUMMARY DATA & FORECASTS POLITICAL RISK tsvangirai treason Charges? Zimbabwe s volatile political environment has been rocked yet again, after Wikileaks revealed confidential talks between senior Movement for Democratic Change (MDC) officials and US diplomats based in the country. Officials from President Robert Mugabe s ZANU-PF party have claimed that the discussions amounted to treason. Zimbabwe s attorney general, who is a FEBRUARY 2011

Mugabe appointee, has said he plans to set up a committee to investigate whether the content of meetings between MDC leader, Prime Minister Morgan Tsvangirai, and American officials amounted to a breach of the constitution. If so, treason charges will be brought against Tsvangirai. Our short-term political risk rating is 37.3. ECONOMIC RISK Golden Potential Zimbabwe says it plans to step up its gold production in light of an embargo on diamond exports from the country. According to media reports, the country s gold mining sector claims a US$1bn investment could lead to its output reaching 50,000 kilograms (kg) over the next five years. This compares with just 15,000kg expected without investment. Industry experts believe Zimbabwe would be the world s largest diamond exporter if the trade embargo had not been introduced as a response to its government s alleged human rights abuses. Our short-term economic risk rating is 40.0. BUSINESS ENVIRONMENT telecoms Investment Econet Wireless, Zimbabwe s biggest mobile operator, says it will have invested an additional US$300mn on expanding and upgrading its network by February 2011. This would take cumulative investment in the

operator s mobile network to about US$1bn as the company has already ploughed in over US$600mn since it started operating in October 1999. Econet s customer base grew rapidly in the two years to December 2010 and BMI believes the operator s commitment to network development will boost capacity and maintain high network quality. Our business environment rating is 26.1. POLITICAL OUTLOOK Political Scenarios For 2011 BMI View: We maintain our view that elections will take place in 2011, and the success of these will hinge on whether a constitution is adopted prior to the polls taking place. As the Government of National Unity (GNU) approaches its second anniversary in February 2011, questions over Zimbabwe s political future loom large. The most obvious is whether elections will take place in 2011 and if so, whether they are deemed to be free and fair. Related to these issues are questions over whether the constitution-making process reaches completion prior to elections and whether this will provide an environment in which a credible vote can take place. Taking the assumption that elections go ahead, the question then becomes in what climate will these happen? Progress on the adoption of a new constitution will be

crucial a process which is ongoing. The Parliamentary Select Committee on the Constitution (COPAC) completed a volatile and controversial outreach programme in October 2010 and is currently creating a draft document. This will be put before the public in a referendum likely to take place in the first half of 2011. If the constitution is rejected, it would bode ill for elections. For one thing , it would mean that many of the political and electoral reforms required to level the playing would not be forthcoming. Additionally, rejection of the constitution may be viewed as rejection of one or other of the major political parties, potentially raising the stakes ahead of what already promises to be a volatile election campaign. Of course, there is no guarantee that elections will take place in 2011. The general populace is broadly against holding polls, as the violence and emotion of recent elections are still fresh in the national psyche and people are reluctant to expose themselves to this once again. The business community believes the country s nascent economic recovery is still too fragile to withstand the negative investor sentiment that fresh elections would almost certainly bring. Given these sources of opposition, elections may not take place in 2011. BMI View: Zimbabwe s economy is set to expand by 7.0% in 2011 despite ongoing political

uncertainty. Agriculture and mining will be at the forefront of this growth, while the manufacturing sector is likely to underperform. This relatively positive view is subject to risks of political turmoil and an unravelling of the business environment, which remain elevated and would have significant negative consequences for economic activity in the country. 2008 2009 2010e 2011f 2012f Population, mn [7] 12.5 12.6 12.6 12.7 13.0 Nominal GDP, US$bn [1,8] 3.2 5.2 5.7 6.3 7.1 GDP per capita, US$ [9] 255 416 451 496 548 Real GDP growth, % change y-o-y [2,9] -14.1 5.8 6.0 7.0 7.2 Budget balance, % of GDP [3,9] -39.6 -2.3 -5.3 -2.0 -1.9 Consumer prices, % y-o-y, ave [4,10] 2,500,017,500.0 -5.0 3.2 3.6 5.0 Consumer prices, % y-o-y, eop [4,10] 5,000,000,000.0 -7.7 4.2 3.0 7.0 Lending rate, %, eop [10] 4,500.0 4,500.0 20.0 18.0 17.0 Real lending rate, %, eop [5,11] -4,999,995,500.0 4,507.7 15.8 15.0 10.0 Exchange rate ZWD/US$, ave [6,12] 250,015,000.00 - - - Exchange rate ZWD/EUR, eop [6,12] 700,000,000.00 - - - Goods exports, US$bn [8] 1.6 1.6 1.8 2.1 2.5 Goods exports, % change y-o-y [9] -8.5 -3.6 13.5 17.1 20.8 Goods imports, US$bn [8] 2.6 3.2 3.6 4.2 4.9 Goods imports, % change y-o-y [9] 24.5 22.2 13.5 16.0 15.5 Balance of trade in goods, US$bn [8] -1.0 -1.6 -1.8 -2.1 -2.3 Current account, US$bn [9] -0.8 -0.9 -1.1 -1.4 -1.5 Current account, % of GDP [9] -26.2 -17.6 -19.6 -21.4 -21.6 Foreign reserves ex gold, US$bn [10] 0.0 0.0 0.0 0.3 0.3 Import cover, months g&s [11] 0.0 0.0 0.1 0.8 0.8 Total external debt stock, US$mn [13] 5,313.7 5,417.1 6,700.0 7,000.0 5,500.0 Total external debt stock, % of GDP [13] 167.1 103.8 117.4 110.7 77.2 Total external debt stock % of XGS [13] 312.4 326.1 351.6 296.1 192.8

Notes: e BMI estimates. f BMI forecasts. 1 Calculated at official rate, until 2005. Rise in 2001 is therefore misleading. Because hyperinflation makes the official rate meaningless, beginning in 2006, figure is an estimate based on international value of US$ and Zimbabwe GDP Volume, where 2005 = 1; 2 Given lack of official data, growth rates up to 2008 are based on Imf estimates. BMI proprietaryforecasts commence from 2009.; 3 Hyperinflation means the local currency budget balance divided by GDP can be a misleading indicator of the balance as a percentage of GDP, so IMF figures are used here, rather than a calculation; 4 From 2009 on, inflation is expressed in US dollar terms, as foreign currency became the widely used legal tender in that year.; 5 Real rate strips out the effects of inflation; 6 Currency redenominated and devalued on January 2006, such that 1,000 old ZWD = 1 new ZWD. Devalued again on July 31 2007 to ZWD30,000/US$, then freefloated in April 2008. Currency was once again devalued in August 2008, such that 10bn old ZWD = 1 new ZWD; Sources: 7 World Bank/BMI calculation/BMI. 8 Central Statistical Office/IMF; 9 Central Statistical Office/IMF/BMI; 10 IMF; 11 IMF/ BMI; 12 BMI; 13 World Bank/BMI.www.meamonitor.com FEBRUARY 2011 SOuthern AFrICA 5 BOTSwANA DATA & FORECASTS RISK SUMMARY POLITICAL RISK hIV/AIDS Partnership Botswana and the United States have signed a five-year agreement to help strengthen Botswana s health care system and improve the national response to HIV/AIDS. The agreement is meant to further align the work of the US President s Emergency Plan For AIDS Relief (PEPFAR), which commits

US$60bn over six years to support developing countries fight against the epidemic, with Botswana s national priorities. The joint effort aims to prevent new HIV infections, especially among children and the most vulnerable populations, and improve treatment for those who already have the disease. Our short-term political risk rating is 77.3. ECONOMIC RISK huge Diamond Investment Debswana, the joint venture between the government of Botswana and the De Beers diamond company, estimates that the proposed expansion of the Jwaneng mine will cost more than BWP24bn (US$3.9bn) over the next sixteen years. The project, called Cut 8, will extend the life of the mine to 2025, from 2017 currently. It is said to be the largest capital investment in the history of Botswana, and will increase employment at the mine by 1,400 people. Authorities estimate that 100mn carats of diamonds will be liberated through the expansion. Our short-term economic risk rating is 57.1. BUSINESS ENVIRONMENT railway Link Mou Signed A memorandum of understanding was signed between Botswana and Namibia to move forward on a full feasibility study for the Trans Kalahari Railway Link between the

two countries. Botswana is seeking to invest in new infrastructure to further integrate the Southern Africa region, while decreasing its dependence on South Africa for both import and export links. A pre-feasibility study, already concluded, foresaw immense economic potential in the project. Once the study is concluded, the project is expected to begin in 2012 or 2013, and cost US$11bn. Our business environment rating is 42.0. ECONOMIC OUTLOOK Cut In Benchmark Rate To Boost Lagging Sectors BMI View: The Bank of Botswana (BoB) s decision to cut the benchmark interest rate by 50bps to 9.50% will help to boost the lagging economic growth of non-mining sectors, as well as hedge against a slowdown in the global economy. Inflation remains above the targeted band of 3-6%, but the wide gap between the BoB benchmark rate and South African repo rate will maintain pressure to keep from hiking in the near term. The monetary policy committee of the Bank of Botswana (BoB) has cut its benchmark interest rate by 50bps following its meeting on December 16 2010, to 9.50%. Although headline inflation stubbornly remains above the targeted band of 3-6%, an uncertain global outlook and its optimistic view on inflation compelled the BoB to make the move. In a statement released by the BoB, the monetary policy committee claimed that most of the rise of the CPI is due to increases in administered prices, alcohol levies, and

VAT, and after the effect of these changes dissipates, inflation will come down within the 3-6% range. They also believe that slow economic growth in South Africa in 2011, of about 3%, will decrease imported inflation from that important trade partner. While BMI agrees that inflation will likely decrease in the medium term, the magnitude of this change may be exaggerated. We expect that Botswana s headline inflation will come down only marginally, hovering above the targeted band, partly due to our more optimistic growth outlook for South Africa. Despite these inflationary pressures, we don t expect the BoB to hike rates until the South African Reserve Bank (SARB) hikes the South African benchmark rate. The Botswana pula follows a crawling peg with the South African rand, and the benchmark interest rates between the two countries has been widening since the beginning of 2010, from 300bps in January to 450bps just before the BoB decision to cut rates. We would expect that the present gap of 400bps is wide enough to pressure the BoB to avoid hiking rates unless absolutely necessary. BMI View: With new expansions in diamond mines, as well as increased production in other minerals, we expect the value of exports to significantly increase in value over the coming years.

Although imports will also increase, our forecasts indicate that the trade deficit will narrow to about US$290mn by 2012. 2008 2009 2010e 2011f 2012f Population, mn [2] 1.9 1.9 2.0 2.0 2.0 Nominal GDP, US$bn [3] 13.4 13.0 16.8 18.3 22.0 GDP per capita, US$ [4] 6,987 6,686 8,510 9,142 10,808 Real GDP growth, % change y-o-y [3] 3.1 -3.7 4.8 5.1 5.0 BWP nominal growth, % change y-o-y [4] 20.4 1.6 15.5 2.1 16.1 Budget balance, % of GDP [4] -4.0 -14.5 -9.7 -7.4 -4.3 Consumer prices, % y-o-y, eop [5] 13.7 5.8 7.8 7.0 7.0 Lending rate, %, eop [6] 15.0 12.2 11.0 12.0 13.0 Real lending rate, %, eop [1,6] 1.3 6.4 3.2 5.0 6.0 Exchange rate BWP/US$, ave [4] 6.79 7.11 6.36 5.96 5.78 Exchange rate BWP/US$, eop [4] 7.60 6.67 6.05 5.87 5.69 Exchange rate BWP/EUR, eop [4] 10.65 8.47 8.17 7.80 7.11 Goods exports, US$bn [3] 4.8 3.4 4.5 5.2 5.8 Goods imports, US$bn [3] 4.4 4.0 5.0 5.3 5.7 Balance of trade in goods, US$bn [3] 0.4 -0.7 -0.4 -0.1 0.1 Current account, % of GDP [4] 6.8 -5.3 -1.8 -0.2 1.2 Foreign reserves ex gold, US$bn [3] 9.1 8.7 8.5 9.0 9.2 Import cover, months g&s [3] 18.7 19.3 15.4 15.3 14.5 Total external debt stock, % of GDP [4] 3.3 14.4 11.2 10.0 8.2 Total external debt stock % of XGS [4] 7.7 51.1 37.1 32.2 27.6 Short term debt as a % of International reserves [4] 0.3 0.2 0.3 0.3 0.3 Short term foreign debt, % of total [4] 5.7 1.2 1.5 1.2 1.6 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 3 BoB, BMI; 4 BMI; 5 CSO, BMI; 6 IMF, BMI; 7 World Bank, BMI.6 6 SOuthern AFrICA FEBRUARY 2011 www.meamonitor.com

ANgOLA RISK SUMMARY DATA & FORECASTS POLITICAL RISK Is the MPLA nervous? Although we expect President Dos Santos party to easily win elections scheduled for 2012, it appears he is becoming nervous about the outcome. These fears are driven by discontent over the administration s handling of the economy during the downturn, and are likely strengthening the perceived need for greater centralisation. Our short-term political risk rating is 69.0. ECONOMIC RISK Private Consumption Below Potential The outlook for private consumption in 2010 and 2011 is mixed. We forecast real growth of 10.0% and 15.0% respectively. Although comparisons to trend growth here are difficult as the pattern has been so erratic, it is safe to say this is below potential, given the relatively low base from which most consumers are rising. For example, private consumption grew by 26.2% in 2007 and 25.0% in 2008. At the lower end of the income scale, the main

factor dragging on consumption is likely to be inflation: consumer price growth had accelerated to 16.1% in October 2010, up from an average of 14.1% in the first three quarters of 2010. Our short-term economic risk has been lowered to 46.5 on account of tighter monetary conditions. BUSINESS ENVIRONMENT energy Cooperation With South Africa. In his first state ever state visit to South Africa, Angolan president Jose Eduardo dos Santos signed a memorandum of understanding with the intention of stepping up cooperation in the field of energy. Although it was not explicitly mentioned in the memo, there was word of an agreement between state owned companies PetroSA and Sonangol to build a refinery at Lobito. The facility could increase Angola s refining capacity by up to 200,000 b/d compared to just 37,500 at present. Given that Angola s daily consumption of oil is around 125,000 b/d, the new refinery would also be capable of exporting to other countries in the region like South Africa. Our business environment rating is 21.6. POLITICAL OUTLOOK

Cracks Showing Below Mantle Of Authority BMI View: Although we still expect President Dos Santos party to win elections scheduled for 2012, and to do so easily, there are a growing number of signs that he is becoming nervous about the outcome. These fears are being driven by the administration s questionable handling of the economy during the downturn, and are likely to be strengthening the perceived need for greater centralisation. While the weakness of Angola s growth story has been known for some time, it seems the malaise is spreading to the political front. The cabinet was reshuffled for the third time in a year in October 2010, and for the first time in his long tenure as president, Jos Eduardo Dos Santos made a State of Nation address before the legislature. On balance, we continue to see centralisation as the dominant theme in domestic politics as the president and his team begin to campaign. Compared with past elections, the difference this time is that the opposition will have much more ammunition to use against the ruling party a fact implicitly recognised by the recent consolidation of power. Cabinet Reshuffle Affects Top Counsel It is no coincidence that the most recent cabinet reshuffle involved some of the country s top economic policy makers. Most significant was the dismissal of Manuel Nunes Junior, the Minister of State for Economic Cooperation. He played a significant role in

leading the economy through the downturn and was seen as one of the key figures in securing the Stand-by Arrangement (SBA) with the IMF. There are contrasting theories on his sacking, but we believe he was muscled out because he was seen as a threat to the president and his other economic advisors. Nunes has yet to be given another job and many of his former duties have been transferred to the Office of the Presidency headed by Carlos Feijo, one of Nunes main rivals within the government. Among other roles, Feijo will take charge of negotiations with the IMF, potentially signalling plans to break off the arrangement if oil revenues continue to hold up at current levels. BMI View: Economic recovery in Angola is clouded by questions over domestic arrears, falling rates of credit growth, reports of liquidity issues at banks, and tight monetary conditionst. While we are more sanguine on 2011, predicting growth of 8.7%, these rates are below Angola s potential. 2008e 2009e 2010e 2011f 2012f Population, mn [2] 18.0 18.5 19.0 19.5 20.1 Nominal GDP, US$bn [3] 93.4 78.4 86.4 115.0 152.1 GDP per capita, US$ [4] 5,185 4,236 4,549 5,891 7,586 Real GDP growth, % change y-o-y [5] 14.8 2.6 7.0 8.7 9.7 AOA nominal growth, % change y-o-y [5] 49.6 -12.9 26.3 24.5 23.1 Budget balance, % of GDP [6] 9.0 -8.1 -3.1 -2.6 -1.2 Consumer prices, % y-o-y, eop [7] 13.2 14.0 16.2 14.0 10.0 Lending rate, %, eop [8] 9.3 16.0 14.0 14.0 14.0 Real lending rate, %, eop [1,9] -3.9 2.0 -2.2 0.0 4.0

Exchange rate AOA/US$, eop [10] 74.98 88.90 89.00 77.40 77.40 Exchange rate AOA/EUR, eop [10] 104.97 112.90 120.15 102.94 96.75 Goods exports, US$bn [9] 64.7 39.6 53.0 61.2 71.2 Goods imports, US$bn [9] 19.8 19.4 26.2 32.0 37.7 Balance of trade in goods, US$bn [8] 44.9 20.2 26.8 29.3 33.5 Current account, % of GDP [9] 24.1 6.5 9.0 8.2 6.5 Foreign reserves ex gold, US$bn [7] 17.5 12.6 13.9 16.7 19.2 Import cover, months g&s [11] 6.3 4.8 4.0 4.2 4.3 Total external debt stock, % of GDP [13] 10.4 14.9 11.3 8.2 6.6 Total external debt stock % of XGS [13] 14.9 29.2 18.3 15.4 13.9 Short term foreign debt, % of total [13] 16.0 16.0 16.0 16.0 16.0 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 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; 9 IMF/BMI; 10 BMI; 11 Banco Nacional de Angola/IMF/ BMI; 12 World Bank GDF; 13 World Bank GDF/BMI.www.meamonitor.com FEBRUARY 2011 SOuthern AFrICA 7 Zambia Must Change Now (ZAMUCANO) formed by Brown Kapita, a Zambian who has returned to the country after living abroad to save the country from recycled leadership . The party was launched in early November with a 17-point manifesto which pledges, among other things, free healthcare, education up to the university level, and nationalisation of the mining sector. The new party will likely drain support for the left-leaning PF, and PF leadership has urged Kapita to consider joining existing parties, saying additional parties will weaken the opposition. The PF has struggled to establish a

broader base in the midst of fragmentation among the opposition. While the PF nominally allied itself with the United Party for National Development (UPND), the pact has failed to produce an undisputed leader, with both Michael Sata (of the PF) and Hakainde Hichilema (of the UPND) vying for the top spot. Rumours that the pact has dissolved are a consistent irritation for leaders claiming that the alliance is united. The Constitution Looms Large Many voters and opposition parties, frustrated with the ruling party s management of the continued from bottom of front page country s resources and public sector, have... rallied to change the electoral system away from the current first-past-the-post system, where the highest-polling candidate wins, resulting in victories for candidates with a minority of total votes. The presidential victors for 2001, 2006, and 2008 all won with a minority of votes, polling 29%, 43%, and 42% respectively. An amendment to change to a 50% +1 system is included in the new 2010 constitution, whereby if the leading candidate fails to obtain more than 50% of the vote, a second runoff election between the two leading candidates is held. Since the reform requires a referendum to become law, however, the government has stated that costs will prevent its adoption before the 2011 election. Opposition parties have cried foul, suspecting the delay is an intentional attempt to hold on to power.

While the MMD would do well to take these concerns seriously, we don t believe the widespread disappointment over election reform will be a bellwether in the 2011 elections. MMD success in attracting investment, spurring growth in manufacturing, and having the good fortune of governing during a very successful growing season, should outweigh comparatively less important concerns over election reform. ZAMBIA RISK SUMMARY POLITICAL RISK new Alliance Planned According to National Revolution Party (NRP) president Cosmo Mumbo, a new alliance of opposition political parties called United Front for Development is being formed. The pact will reportedly include the NRP, Africa s Democratic and Economic Development Organization-Zambia Must Change Now, and some parliamentarians from both the United Party for National Development and the Patriotic Front. This latest attempt at consolidating the fragmented opposition to the ruling party, the Movement for Multiparty Democracy, is for the unity, peace, and development of Zambia, Mumbo said. Our short-term political risk rating is 67.9.

ECONOMIC RISK Dangote to Invest uS$400mn Dangote Cement, Nigeria s largest cement maker, has announced it will invest US$400mn to build a cement plant in Zambia. The project is scheduled to take about three years, from 2011 to 2013. Aliko Dangote, founder and CEO of the company, said the plant would produce 1.5mn tonnes of cement when it reaches full production capacity. He added that the Zambian investment is among the company s largest outside of mining. Dangote plans to build other plants and import terminals in other African countries, with a view to greatly expand production. Our short-term economic risk rating is 52.9. BUSINESS ENVIRONMENT Licenses Issued After passing a new law on licensing fees, Zambia has begun issuing gas and oil exploration licenses to seven foreign and local companies. GP Petroleum and Petrodel Resources of the UK, Glint Energy of the United States and Exile Resources of Canada were chosen along with Zambian firms Majetu, Barotse Petroleum Company and Chat Milling. According to the Mines minister, Maxwell Mwale, exploration will likely begin around April at the conclusion

of the rainy season. The companies had delayed their exploration in anticipation of the new law. Our business environment rating is 37.9. DATA & FORECASTS BMI View: We expect double-digit inflation will return by the end of 2011, as the high volume of domestically produced food seen by the most recent bumper harvests is not likely to be repeated (at least to the same extent). Contracted supply and consequently higher food prices will drive up headline inflation to 10.0% eop 2011. 2008 2009 2010e 2011f 2012f Population, mn [2] 12.6 12.9 13.3 13.6 13.9 Nominal GDP, US$bn [3] 14.8 12.8 16.2 18.9 22.1 GDP per capita, US$ [4] 1,176 992 1,223 1,389 1,587 Real GDP growth, % change y-o-y [3] 5.7 6.3 7.1 6.8 6.4 ZMK nominal growth, % change y-o-y [4] 19.6 16.6 17.1 16.7 15.8 Budget balance, ZMKbn [5] -808.0 -2,084.0 -1,940.0 -1,627.0 -946.0 Budget balance, % of GDP [6] -1.5 -3.2 -2.6 -1.8 -0.9 Consumer prices, % y-o-y, ave [7] 12.4 13.4 8.4 8.4 10.0 Consumer prices, % y-o-y, eop [7] 16.6 9.9 6.9 10.0 10.0 Lending rate, %, eop [8] 19.1 18.0 17.0 16.0 15.0 Real lending rate, %, eop [1,9] 2.5 8.1 10.1 6.0 5.0 Exchange rate ZMK/US$, eop [10] 4,785.00 4,631.00 4,700.00 4,650.00 4,60 0.00 Exchange rate ZMK/EUR, eop [10] 6,699.00 5,881.37 6,345.00 6,184.50 5,750.00 Goods exports, US$bn [8] 5.0 4.3 6.8 7.9 8.6 Goods exports, % change y-o-y [9] 10.0 -12.9 58.6 15.9 7.9 Goods imports, US$bn [8] 4.5 3.4 4.6 5.3 5.8 Goods imports, % change y-o-y [9] 26.1 -25.1 35.0 15.0 10.0

Balance of trade in goods, US$bn [8] 0.4 0.9 2.2 2.6 2.7 Current account, US$bn [8] -1.4 -0.7 0.2 0.2 0.1 Current account, % of GDP [9] -9.2 -5.5 1.1 1.3 0.3 Import cover, months g&s [12] 2.4 7.5 6.1 5.7 5.5 Total external debt stock, % of GDP [13] 20.1 23.4 18.5 17.2 15.8 Short term debt as a % of International reserves [13] 27.3 11.7 10.9 11.1 11.4 Short term foreign debt, % of total [13] 10.0 10.0 10.0 10.0 10.0 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 3 IMF/Bank of Zambia; 4 IMF/Bank of Zambia/BMI; 5 IMF, MoFNP; 6 IMF/MoFNP, BMI; 7 Central Statistics Office; 8 IMF; 9 IMF/BMI; 10 BMI; 11 IMF IFS; 12 IMF IFS/BMI; 13 World Bank/BMI.8 8 SOuthern AFrICA FEBRUARY 2011 www.meamonitor.com MAURITIUS RISK SUMMARY DATA & FORECASTS POLITICAL RISK Marine Park Challenge Mauritian Prime Minister Navinchandra Ramgoolam announced that the government is planning to contest the legality of a new marine park near the disputed Chagos islands. Britain leased the largest island in the archipelago to the US in 1966 for the construction of an airbase which required the forced removal of some 2000 Chagossians. US diplomatic cables published on the WikiLeaks website recently showed that the marine park was allegedly created to prevent uprooted islanders from returning. The Mauritian government will appeal to the International Tribunal for the Law of the

Sea on the grounds that it was in violation of the 1982 United Nations Convention on the Law of the Sea. Our short-term political risk rating is 82.7. ECONOMIC RISK economy to treble In Size By 2024 Mauritius s finance minister, Pravind Jugnauth, is expecting the island nation s nominal GDP to reach MUR1trn (US$33.1bn) by 2024, compared with the present value of MUR290bn (US$9.6bn). The Indian Ocean island nation, which has pitched itself as a bridge between Africa, India and China, has seen significant growth in the offshore financial sector, which has helped it post strong economic growth. Jugnauth said that from 2000 to 2010, GDP at market prices rose by 9.2% annually on average, while an average of 8.4% was recorded for nominal GDP per capita. Our short-term economic risk rating is 64.4. BUSINESS ENVIRONMENT unemployment On the rise Unemployment in Mauritius rose to 7.6% in Q310 compared with 7.4% in Q309, according to data released by the Central Statistics Office. The rise in the unemployment rate is attributed to the global economic slowdown, which hit the tourism sector and key export sectors such as textiles. According to government statistics, the number of

people unemployed in the India Ocean island nation stood at 44,000 in Q310. The full-year jobless rate is estimated to reach 7.5% in 2010, up from 7.3% in 2009. Our business environment rating is 60.2. ECONOMIC OUTLOOK Inflationary Pressures Building BMI View: We are of the view that the monetary policy committee (MPC) will stick to its plan to keep interest rates on hold at its next meeting in March 2011. That said, growing concerns that inflationary pressures are building could see rates increased. The monetary policy committee (MPC) of the Bank of Mauritius held the benchmark lending rate at 4.75% at its December meeting. The decision was in line with the bank s stated intention to leave the policy rate unchanged for two quarters after a 100 basis point (bp) cut at its September MPC meeting. In the accompanying monetary policy statement, the authorities noted that while economic activity is gradually recovering, uncertainties in major trading partners warrant caution over removing monetary stimulus too quickly. The MPC also noted that inflationary pressures are building and that counter to the aforementioned commitment to hold rates steady for two quarters, a rate hike could be on the cards at the next meeting in March.

We acknowledge that inflationary risks are to the upside. After bottoming at 0.1% year-on-year in October 2009, inflation has edged higher over the course of 2010 to come in at 3.9% y-o-y in November. The MPC believes that this could jump to 7.0% by June 2011 and should this eventuate, the authorities will be hard pressed to not raise rates. In terms of sources of inflationary pressure, the government unveiled a growthsupportive 2011 budget in November and if the stimulus measures gain traction more quickly than we currently anticipate, this will be inflationary. Secondly, Mauritius is a food and energy importer and therefore remains susceptible to global commodity prices. Our own view is that rates will remain on hold in March and that the tightening cycle will begin in the middle of 2011. We are in agreement with the MPC insofar as we see inflation heading higher in 2011. However, our forecast is for a more gradual increase: we expect headline price growth to average 5.1% in 2011, ending the year at around the 6.0% mark in year-on-year terms. This expectation is based on the assumption that a relatively tepid domestic economic outlook will help to contain demand-pull inflationary pressures.

BMI View: The Mauritian rupee had a volatile 2010 against the US dollar, selling off sharply in Q2 before clawing these losses in Q3. We believe the currency will continue to fluctuate in 2011 as conflicting pressures are exerted by the country s external accounts. On balance, we expect slight appreciation over the year and have pencilled in MUR29.00/US$ as our year end target. 2008 2009 2010e 2011f 2012f Population, mn [2] 1.3 1.3 1.3 1.3 1.3 Nominal GDP, US$bn [3] 9.4 8.7 9.9 11.1 12.8 GDP per capita, US$ [3] 7,436 6,790 7,742 8,640 9,922 Real GDP growth, % change y-o-y [3] 5.1 3.1 3.9 4.3 5.0 MUR nominal growth, % change y-o-y [3] 12.5 3.6 6.7 8.3 9.2 Budget balance, MURbn [4] -3.5 -4.8 -5.9 -5.7 -4.7 Budget balance, % of GDP [4] -1.3 -1.7 -2.0 -1.8 -1.4 Consumer prices, % y-o-y, eop [3] 8.0 1.5 3.6 4.0 4.0 Lending rate, %, eop [5] 9.5 8.5 8.5 9.0 10.0 Real lending rate, %, eop [1,6] 0.5 7.0 5.4 6.0 6.0 Exchange rate MUR/US$, eop [7] 31.50 29.00 30.00 29.00 27.00 Exchange rate MUR/EUR, eop [7] 44.10 36.83 40.50 35.91 33.75 Goods exports, US$bn [3] 2.4 2.0 2.1 2.3 2.5 Goods imports, % change y-o-y [3] 20.6 -25.0 12.0 8.0 8.0 Balance of trade in goods, US$bn [3] -2.3 -1.6 -1.8 -2.0 -2.1 Current account, % of GDP [3] -10.5 -7.9 -7.7 -8.2 -8.0 Foreign reserves ex gold, US$bn [5] 1.7 2.2 2.4 2.6 2.8 Import cover, months g&s [6] 4.2 6.2 6.3 6.4 6.3 Total external debt stock, % of GDP [6] 6.6 12.4 13.8 11.9 10.2 Total external debt stock % of XGS [6] 12.5 25.4 30.1 26.9 24.6 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 3 Central Statistics Office/BMI; 4 Ministry Of Finance/BMI; 5 IMF; 6 IMF/BMI; 7 BMI.www.meamonitor.com FEBRUARY 2011 SOuthern AFrICA 9

MAdAgASCAR DATA & FORECASTS RISK SUMMARY POLITICAL RISK Alleged Coup Plotter Indicted A Malagasy court has charged a former International Court of Justice judge with threatening state security, owing to an alleged link with the November 2010 attempted coup. Specifically, Raymond Ranjeva was indicted on charges of complicity to incite unrest, civil war and acts of destabilisation , according to his lawyer. Prior to the unsuccessful coup, Ranjeva called for a real neutral transition which he would lead as an alternative to Madagascar s current administration led by President Andry Rajoelina. Investigators are now examining the links between his declaration and the mutiny. Our short-term political risk rating is 34.0. ECONOMIC RISK Bharti Money transfer Service Bharti Airtel began operating a mobile money-transfer service in Madagascar in December 2010. The company hopes that the service will tap demand for financial services among the unbanked . Bharti is targeting 3.2mn mobile-phone customers by the end of 2011 compared with 2mn at

present. The firm intends to invest US$50mn in Madagascar over the coming 18 months. This bodes well for economic growth, but we caution that our overall outlook is rather pessimistic at present, given the political malaise and associated drying up of overseas aid flows and foreign investor interest. Our short-term economic risk rating is 31.7. BUSINESS ENVIRONMENT Madagascar Oil retreats Madagascar Oil has asked for its shares to be suspended from London s Alternative Investment Market following signs that the Malagasy government is interested in acquiring most of its assets underscoring the uncertain business environment amid the political crisis. The Ministry of Mines and Hydrocarbons reportedly stated its intention to acquire all of the company s licences, bar one. Madagascar Oil listed only a few weeks ago, and intended to use the capital for the exploration and development of its onshore blocks. Our business environment rating is 32.5. POLITICAL OUTLOOK New Constitution No Game-Changer BMI View: Although a new constitution has been passed in Madagascar, it has not

brought an end to the long-running political malaise. There is potential for some resolution of the crisis if presidential elections go ahead in May and Andry Rajoelina loses power, but this is by no means guaranteed. A new constitution has been passed in Madagascar, making it legal for incumbent President Andry Rajoelina (aged 36) to stand in presidential elections scheduled for May 2011 although he claims he does not plan to run. A referendum was held on November 17 2010 to approve the new charter, which lowered the minimum age of the president to 35 years from 40. Voter turnout was relatively high at 52.6% this was somewhat surprising, given that it was unilaterally organised by the interim administration, and opposition parties had called for the referendum to be boycotted. Of those that did turn out to vote, 74.0% opted in favour of the new constitution. Although locals may now believe some progress is being made on the political front, we anticipate that foreign relations will remain strained over the foreseeable future. There was reportedly a complete absence of congratulatory messages from foreign diplomats, and attempts are still being made to broker a power-sharing deal between President Rajoelina and the opposition. A SADC delegation recently arrived in Antananarivo, with the intention of commissioning a local liaison office for international mediation.

With Madagascar seemingly set to remain an international pariah, and Rajoelina unlikely to submit to power-sharing talks any time soon, we see the nation s political crisis rumbling on. Some resolution may occur if the presidential elections go ahead in May and a new leader comes to power, but with Rajoelina benefiting from incumbency advantages, this is by no means guaranteed. Indeed, several key opposition figures remained imprisoned at the time of writing, casting doubt over their ability to contest the presidency. BMI View: We are currently forecasting real GDP growth of 1.7% in 2011, with our outlook predicated on the expectation that there will be some form of resolution to the political crisis. However, we are mindful of downside risks should the stalemate continue throughout the year. 2008 2009 2010e 2011f 2012f Population, mn [4] 19.1 19.6 20.1 20.7 21.2 Nominal GDP, US$bn [5] 9.5 8.6 8.7 9.2 10.9 GDP per capita, US$ [6] 498 436 432 447 514 Real GDP growth, % change y-o-y [5] 5.0 -0.2 -1.5 1.7 3.4 MGA nominal growth, % change y-o-y [5] 17.2 3.0 8.6 10.0 9.7 Budget balance, % of GDP [1,8] -1.9 -2.2 -2.4 -2.2 -2.1 Consumer prices, % y-o-y, ave [9] 9.2 9.0 9.0 8.3 8.0 Consumer prices, % y-o-y, eop [9] 10.1 8.0 8.6 8.0 8.0 Lending rate, %, eop [5] 45.0 45.0 45.0 30.0 30.0 Real lending rate, %, eop [2,10] 34.9 37.0 36.4 22.0 22.0 Exchange rate MGA/US$, eop [11] 1,823.00 1,950.00 2,200.00 2,095.24 1,904.76 Exchange rate MGA/EUR, eop [11] 2,552.20 2,476.50 2,970.00 2,786.67 2,380.95 Goods exports, US$bn [3,7] 1.3 1.2 1.2 1.3 1.5 Goods imports, US$bn [3,7] 3.2 2.6 2.7 2.9 3.2

Balance of trade in goods, US$bn [3,7] -1.9 -1.4 -1.5 -1.6 -1.7 Current account, % of GDP [3,8] -20.1 -17.0 -18.0 -18.0 -16.7 Foreign reserves ex gold, US$bn [5] 1.0 1.1 1.0 1.0 0.9 Import cover, months g&s [6] 2.8 4.0 3.5 3.1 2.8 Total external debt stock, % of GDP [12] 21.9 25.6 23.9 21.4 17.2 Total external debt stock % of XGS [12] 108.4 122.8 114.3 101.8 88.4 Short term debt as a % of International reserves [12] 12.7 11.6 12.2 12.2 11.8 Short term foreign debt, % of total [12] 6.0 6.0 6.0 6.0 6.0 Notes: e BMI estimates. f BMI forecasts. 1 IMF 1990-2007; AfDB 2008-2009; 2 Real rate strips out the effects of inflation; 3 IMF 1990-2005; AfDB 2006-2009; Sources: 4 World Bank/BMI calculation/BMI. 5 IMF; 6 IMF/BMI Calculation; 7 IMF/ African Development Bank; 8 IMF/African Development Bank/BMI Calculation; 9 Central Bank of Madagascar; 10 IMF/ BMI; 11 BMI; 12 World Bank GDF.10 10 SOuthern AFrICA www.meamonitor.com MOZAMBIqUE RISK SUMMARY DATA & FORECASTS POLITICAL RISK Civil Servants Jailed The Cabo Delgado provincial court, in northern Mozambique, sentenced 11 senior and mid-level civil servants to jail for their alleged involvement in stealing MZN5mn (US$146,200) in 2006. The court found them guilty of forging documents and covering up illegal procedures in order to siphon money out of the province s treasury. Two of the more senior officials were sentenced FEBRUARY 2011

to 20 years in jail, while the other nine were each sentenced to 16 years. The sentencing follows allegations described by a US diplomat that Mozambican officials have been taking bribes from narcotraffickers. Our short-term political risk rating is 66.9. ECONOMIC RISK Vehicle Plant Planned Tong Jian Investment of China has signed a US$200mn agreement to build a vehicle assembly plant in Maputo province in Mozambique, according to the state-run Agency of Information (AIM), which cited the director-general of the country s office for special economic zones, Danilo Nala. The plant is expected to become operational in July, and will reportedly create 3,000 jobs. AIM believes that 10,000 vehicles will be produced at the facility initially, before rising to as much as 50,000. Our short-term economic risk rating is 32.3. BUSINESS ENVIRONMENT AfDB Funding Infrastructure The African Development Bank (AfDB) has granted Mozambique US$1.7bn since it began operating in the country in 1977, according to bank representative Alice Hamer. The funding has been used in 87 development projects. The AfDB s current

portfolio of 18 projects, funded through loans and donations, totals US$475mn and focuses on developing rural infrastructure, particularly as it relates to agriculture. Hamer was speaking during a visit to the city of Maxixe to inaugurate a recently completed water supply system in the region which was built as a collaboration between the AfDB and the Mozambican government. Our business environment rating is 28.6. POLITICAL OUTLOOK Frelimo To Maintain Power BMI View: Although the weak and divided opposition is unable to capitalise politically on recent protests against bread prices, the government must move quickly to entrench a coherent agriculture strategy if it is to reduce the threat of future violent protests. In late October 2010, Mozambique s main opposition party, Resistncia Naional Moambicana (Renamo), called for the formation of a transitional government and threatened to orchestrate nationwide demonstrations in the event that the government does not meet its demand within 45 days. Given serious deficiencies in the organisational discipline of Renamo, the party s threat to orchestrate fresh protests is not particularly credible. Renamo has struggled to formulate a coherent appeal to Mozambicans since abandoning an armed struggle that was partially funded by South Africa s old apartheid regime. The party now suffers from dissension after Guebuza s ruling

Frelimo party co-opted a significant faction following the November 2009 elections. While Mozambique s principal opposition party continues to fail to connect with the country s citizenry, further potentially violent protests (organised independently of Renamo) may still occur. There is significant resentment towards the incumbent regime, despite Guebuza s apparent resounding victory just a year ago. Most of the eligible electorate (55%) failed to turn out for the last presidential election, implying a lack of faith in both Guebuza and the out-of-touch Dhlakama. Despite a widespread lack of faith in the political process by the poorer sections of Mozambican society, as well as an ongoing risk of occassional violence, we do not believe that fresh protests will coalesce into widespread and sustained armed activity against the regime (at least for the moment). The ruling party has shown an ability to take the sting out of popular wrath, at times when such resentments threaten to escalate beyond the state s control. While lethal force was used in response to the September riots, the government quickly made concessions by abandoning the hike in bread prices, for example. A situation that threatened to spiral

out of control was quickly de-escalated by a regime that has, over the decades, learnt to offer carrots alongside sticks. BMI View: A country with great natural resource wealth, Mozambique is looking to further develop its mining sector and increase foreign exchange reserves through exports and import substitution of minerals and mineral-based products. We expect infrastructural improvements in the industry and expanded production to contribute to headline GDP growth of more than 6.0% over the next few years. 2008 2009 2010e 2011f 2012f Population, mn [2] 22.4 22.9 23.4 23.9 24.4 Nominal GDP, US$bn [3] 8.1 8.0 8.3 10.3 13.3 GDP per capita, US$ [3] 856 790 830 942 1120 Real GDP growth, % change y-o-y [3] 6.7 6.4 8.5 8.2 6.9 MZM nominal growth, % change y-o-y [3] 16.0 10.4 17.9 24.5 16.8 Budget balance, % of GDP [4] -2.8 -7.0 -7.2 -4.2 -3.0 Consumer prices, % y-o-y, ave [5] 14.7 3.5 9.7 14.8 10.5 Consumer prices, % y-o-y, eop [5] 11.8 1.9 17.5 12.0 9.0 Lending rate, %, eop [6] 18.0 15.5 16.5 16.5 15.5 Real lending rate, %, eop [1,6] 6.2 13.6 -1.0 4.5 6.5 Exchange rate MZM/US$, eop [7] 25.10 28.35 32.00 29.00 26.00 Exchange rate MZM/EUR, eop [7] 35.14 36.00 47.25 38.57 32.50 Goods exports, % change y-o-y [8] 10.0 -30.2 34.0 12.0 10.0 Goods imports, % change y-o-y [8] 23.0 -6.2 13.0 10.0 9.0 Balance of trade in goods, US$bn [8] -0.8 -1.4 -1.2 -1.2 -1.3 Current account, % of GDP [8] -12.0 -14.4 -11.9 -10.2 -8.4 Foreign reserves ex gold, US$bn [8] 1.6 1.8 2.0 2.1 2.3 Import cover, months g&s [8] -4.3 -5.2 -4.9 -4.9 -4.9

Total external debt stock, % of GDP [9] 42.5 44.3 43.7 36.5 29.1 Short term debt as a % of International reserves [9] 58.8 54.0 51.9 49.5 47.2 Short term foreign debt, % of total [9] 27.0 28.0 28.0 28.0 28.0 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 3 INE/BCM/BMI; 4 INE/BCM/IMF; 5 INE/BCM; 6 IMF/BMI; 7 BMI; 8 BCM/IMF/BMI; 9 GDF/BMI.www.meamonitor.com FEBRUARY 2011 SOuthern AFrICA 11 NAMIBIA DATA & FORECASTS RISK SUMMARY POLITICAL RISK SWAPO reigns Supreme The South West Africa People s Organisation, the ruling party in Namibia, coasted to an overwhelming victory in the vast majority of the country during regional elections late in November 2010. The party claimed 92% of constituencies, with 98 out of a possible 107, and won majorities in 33 of the country s 44 local authorities. Opposition party Rally for Democracy and Progress won only one constituency, but obtained seats in over half of all town councils. The election was characterised by low voter turnout, at about 40%. Our short-term political risk rating is 67.1. ECONOMIC RISK Fitch rating revised Fitch Ratings has upgraded Namibia s outlook from stable to positive , attributing the revision to the country s resilience during

the global economic recession, and strong prospects for the mining sector. The agency expects uranium production to increase fourfold by 2015, increasing tax revenues and its ability to pay its debts. This is expected to offset the decline in Southern Africa Customs Union transfers due to changes in revenue distribution (with a smaller share of revenues coming to Namibia), and lower tariffs overall. Large investments in public infrastructure and low inflation support also bode well for the country s outlook. Our short-term economic risk rating is 60. BUSINESS ENVIRONMENT Airports to See upgrade The acting CEO of The Namibian Airports Company announced a NAD1.2bn (US$175mn) upgrade to the infrastructure of several airports over the next five years, representing the largest capital project in the history of the company. Upgrades include new terminals in Walvis Bay, Ondangwa, and Hosea Kutako International (HKIA) airports. A new fire station at Walvis Bay has already been completed, and a rehabilitation of the runway at HKIA is underway. After the improvements are completed, the airport will be able to accommodate larger aircraft, and more passengers.

Our business environment rating is 62.7. ECONOMIC OUTLOOK Rate Cut Signals Growth Concerns BMI View: The Bank of Namibia s decision to slash rates by 75bps to 6.00% will help to boost economic growth, as well as lessen pressures on the currency occasioned by the wide spread between the BoN benchmark rate and the repo rate in South Africa. As BMI expected, the executive committee of the Bank of Namibia (BoN) decided to cut the benchmark interest rate during its meeting on December 14 2010. The 75bps cut to 6.00% is the largest since April 2009, as the committee sought to mitigate what it called visible and persisting downside risks that could negatively affect the pace of recovery in the near future . The mining and agriculture sectors have seen improvements and credit extension to businesses has since the BoN s last monetary meeting in October. Despite these signs of recovery, the committee noted that month-on-month output growth was slowing in these sectors, and the recovery in developed markets was uneven and difficult to predict. Inflation dynamics also played a role in the decision to cut rates. Headline y-o-y inflation in October 2010 was the lowest it had been in five years, at 3.2%, providing the BoN with the necessary flexibility for another round of monetary easing.

A final reason behind the rate cut was the relatively wide differential between the Namibian and South African benchmark rates. The benchmark interest rate in South Africa is 5.50% since its meeting in November 2010, creating an exceptionally large gap of 125bps between the SARB benchmark and the BoN benchmark. The BoN rate cut brings this gap to a more reasonable level of 50bps. This should reduce the arbitrage incentives between the two countries, easing pressure on the Namibian dollar s peg to the South African rand. BMI believes that the BoN will continue to keep its benchmark rate in close step with the SARB repo rate. Given the low inflationary environment and desire to bolster economic activity in South Africa, we expect both countries to hold rates at their current (historically low) levels for some time. BMI View: Year-on-year inflation reached a five-year low of 3.2% in October, continuing a trend of decreasing inflation which characterised nearly all of 2010. We don t believe this trend will continue moving forward, with the rate of price growth expected to increase in the coming years. The double-digit inflation experienced in late 2008 and early 2009 is not expected to return in the foreseeable future, however. 2008 2009 2010e 2011f 2012f Population, mn [2] 2.1 2.2 2.2 2.2 2.3 Nominal GDP, US$bn [3] 8.9 9.3 11.4 13.6 15.7

GDP per capita, US$ [3] 4,262 4,451 5,407 6,385 7,308 Real GDP growth, % change y-o-y [3] 3.3 -0.9 3.8 4.5 5.2 NAD nominal growth, % change y-o-y [4] 17.9 6.2 3.7 11.6 11.9 Unemployment, % of labour force, eop [5] 31.3 31.0 30.6 30.4 30.2 Budget balance, % of GDP [4] 4.5 1.9 -1.7 -4.3 -5.3 Consumer prices, % y-o-y, ave [7] 10.3 8.8 4.5 4.1 5.6 Consumer prices, % y-o-y, eop [7] 10.9 7.0 3.6 5.5 5.7 Lending rate, %, eop [8] 13.7 10.5 6.9 5.5 6.1 Real lending rate, %, eop [1,6] 2.8 3.5 3.3 -0.0 0.4 Exchange rate NAD/US$, eop [4] 9.37 7.50 6.70 6.50 6.30 Exchange rate NAD/EUR, eop [4] 13.12 9.53 10.10 10.94 13.12 Goods exports, US$bn [4] 3.1 3.4 3.9 4.8 5.7 Goods exports, % change y-o-y [4] 7.6 6.8 15.1 25.3 17.6 Goods imports, US$bn [3] 3.8 4.4 4.8 5.7 6.4 Goods imports, % change y-o-y [4] 23.8 14.8 8.8 19.0 12.5 Balance of trade in goods, US$bn [3] -0.7 -1.1 -0.9 -0.9 -0.7 Current account, % of GDP [4] 3.9 2.9 -4.7 -4.5 -2.7 Import cover, months g&s [4] 3.5 5.5 4.7 5.5 6.3 Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation; Sources: 2 World Bank/BMI calculation/BMI. 3 BoN, BMI; 4 BMI; 5 IFS; 6 IMF/BMI; 7 NPC/Central Bureau of Statistics,BMI; 8 IMF.Analyst: Alan Cameron Editor: Lisa Lewin Sub-Editor: Kerry Lambeth Subscriptions Manager: Yen Li Marketing Manager: Julia Consuegra +44 (0)20 7246 5131 Production: Lisa Church/Chuoc Lam Publishers: Richard Londesborough/Jonathan Feroze 2011 Business Monitor International. All rights reserved.

All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content. www.meamonitor.com REgIONAL ECONOMIC OUTLOOK Rising Commodity Prices: Implications For SSA BMI View: The ongoing rise of commodity prices presents a major challenge for several African countries, and in extreme cases, could become a threat to stability. Among other things, a country s relative exposure is determined by its net trade position, its level of income, and the policies taken by its government on subsidies of essential goods. By these measures, the countries with the greatest exposure are Nigeria and Mozambique. The combination extraordinarily loose monetary policy in the US, an absence of viable investment opportunities and a

depreciating US dollar has fuelled a rally across the entire spectrum of so-called risk assets in 2010. Commodities have been no exception to this trend, and like EM stock markets, many are flirting with all-time highs. As a relatively impoverished region and net importer of many internationally priced materials, Africa is vulnerable. However, differences in wealth and structure among economies mean not all countries will be impacted equally. Here we attempt to determine which countries are relatively more exposed, and what implications rising food prices hold for policy. The rise in commodity prices from their March 2009 lows was initially greeted with relief, as a sign that the global economy was pulling back from the brink of collapse. But more than a year and a half later, as many of these markets are in danger of returning to their pre-crisis highs, fears that rising prices will cause unrest are beginning to re-emerge. This is particularly so in the case of food, which is the largest expenditure for most African households, and was widely acknowledged to be behind the inflationary episode of 2007-2008. To get a sense of how sharply food prices have risen over the past 18 months, we look to the UN Food and Agriculture Organization s (FAO) food price index, comprised of six sub indices representing the international

prices of major food groups. As shown in the accompanying chart, the index is now just a shade below its all-time high of 213.5 in June 2008, when protests were occurring across the EM world. Which Countries Are Most Exposed? In much the same way that sub-groups will not all rise at the same at the same pace, not all countries will feel the effect of rising commodity prices in the same way. Among other variables, one of the most obvious and important considerations is whether (and to what to degree) a country is self-sufficient in food and fuel. Using data from the FAO, we compiled average trade positions in food as percentage of GDP from 2001-2008. Regrettably this does not capture the full effect of the spike in 2008-2009, but it does give a general impression of which countries are most exposed to the trend in international prices. The second variable that will determine a country s relative exposure is wealth, measured in terms of GDP per capita. Because more affluent countries have more disposable income, they are more capable of coping with higher prices of basic goods like food. In theory, it would just mean

substituting away from other discretionary purchases in order to prioritise food and fuel. In countries where there is little disposable income in the first place, rising food and fuel costs necessarily mean less consumption and will in all likelihood fuel social unrest. But even here the headline statistics can be misleading: high GDP per capita on a national scale often obscures vast income inequalities within a single country, meaning that the majority of the population can still be very vulnerable to rising commodity prices. The classic example here is Angola. It follows from the general point about income per capita that the poorest countries will allocate a greater share of their consumer price baskets to essential goods like food and fuel. While a price basket, since it is only a statistically constructed measure, is unlikely to change how things feel on the ground, its composition will have a direct impact on headline inflation figures. Among the countries surveyed for this article, the lowest income countries are typically those with the highest weighting of food. Although the relative weighting of fuel is more difficult to determine because the relevant sub-components differ by country some call it utilities while others lump it into transport we suspect the same relationship holds. In any case, the countries that

appear to have the greatest exposure by trade position and GDP per capita are also those where the headline inflation will be most affected by commodity prices. Near Record Levels FAO Food General Food Price Index Source: FAO 50 70 90 110 130 150 170 190 210 230 90 - Jan 90 - Nov 91 - Sep 92 - Jul 93 - May 94 - Mar 95 - Jan 95 - Nov 96 - Sep 97 - Jul

98 - May 99 - Mar 00 - Jan 00 - Nov 01 - Sep 02 - Jul 03 - May 04 - Mar 05 - Jan 05 - Nov 06 - Sep 07 - Jul 08 - May 09 - Mar 10 - Jan 10 - Nov Deficit Is The Norm Africa Net Trade Position In Food* 2001-2008 (% Of GDP) Source: FAO *Includes cocoa, maize, rice, sugar & wheat -6 -4 -2 0 2 4 6 8

10 Zimbabwe Mozambique Ethiopia South Africa Senegal Kenya DRC Nigeria Botswana Zambia Angola Uganda Cameroon Ghana Cte d'Ivoire Wealthy Countries Are Less Exposed Africa Weighting Of Food In CPI Source: BMI, Central Banks, National Statistical Offices 0 10 20 30 40 50 60 70 Mozambi Ethiopia Senegal Nigeria Zambia Tanzania Ghana

Cameroon Kenya Zimbabwe Uganda Cte Botswana