Madagascar's Failed Coup Deals Fresh Blow to Economy Crippled by Crisis

Madagascar’s government hoped last week’s referendum on a new constitution would ease the nation’s political and economic isolation. Instead, a coup attempt on the day of the vote plunged the economy deeper into turmoil.

“It’s a step back,” Lydie Boka, the director of Lille- based risk analysis group StrategiCo., said by phone on Nov. 19. “In order for the EU or U.S. to come back there needs to be a return to political stability.”

The European Union and the U.S. halted non-humanitarian aid to Madagascar after President Andry Rajoelina, a former DJ and mayor of Antananarivo, the capital, seized power from his predecessor Marc Ravalomanana with the help of the military in March last year and later reneged on power-sharing agreements. On Nov. 17, 20 senior officers turned against him, demanding that he hand power to the army.

The withdrawal of aid, which represented two-thirds of the Indian Ocean island nation’s budget, led the economy to contract 3.7 percent in 2009 and 2 percent this year, according to the International Monetary Fund, making Madagascar the only African economy to shrink this year.

The rebel officials held out at a military base near the international airport north of Antananarivo for three days, before it was stormed by troops loyal to the government on Nov. 20. There were no casualties, Defense Minister General Lucien Rakotoarimasy said.

Rajoelina’s “yes” vote won the referendum with about 74 percent of the vote, according to preliminary results from the National Independent Electoral Commission today. Voter turnout was 53 percent, it said.

‘Persistent’ Tensions

The coup attempt “illustrates the persistent economic, social and security tensions,” EU foreign policy chief Catherine Ashton said in a statement on Nov. 19.

The authorities detained 16 officers, including General Noel Rakotonandrasana and Colonel Charles Andrianasoavina, who announced the coup on Nov. 17, Colonel Richard Ravalomanana, the head of security in the central region, including the capital, said today by phone.

“In other African countries, even if they’re not transparent, they’re predictable,” Robert Strauss, head of the American Chamber of Commerce in Madagascar, said in an interview from Antananarivo. “Here, it’s not clear what the rules are, or who they apply to.”

Madagascar’s mineral and oil wealth has attracted companies such as Rio Tinto Plc, Total SA and Toronto-based Sherritt International Corp., which has a 40 percent stake in the $4.65 billion Ambatovy nickel project.

Nickel Gains

Nickel gained 3.5 percent to $21,550 per metric ton on the London Metal Exchange on the day of the coup attempt on concern the mine won’t start producing in the first half of next year as planned. The metal gained a further 1.4 percent the next day and was little changed on Nov. 19.

Last week’s uprising had no impact on the development plan for the Ambatovy mine, Koji Furui, a spokesman for Tokyo-based Sumitomo Corp., which owns 27.5 percent of the project, said by phone on Nov. 19.

Other projects are in limbo.

An oil exploration licensing round due to take place last month has been delayed indefinitely. It will only be considered when the government revises its petroleum code, which has been put off since Rajoelina took power, Joeli Valerien Lalaharisaina, general manager of the Office for National Mining and Strategic Industries, said on Oct. 21.

Textile Factory

The U.S., which accounted for about $278 million of Madagascar’s textile exports in 2008, has dropped the country from the African Growth and Opportunity Act, which gives African nations preferential access to the American market.

The K3 Apparel factory, which exported to the U.S., may have to shut if the owners can’t find buyers in Europe for the shirts and trousers it produces, Sanjay Chandran, the plant’s general manager, said by phone. That would mean the loss of 450 jobs.

“If I get orders from elsewhere we will survive; if we don’t we will have to shut,” said Chandran, a 36-year-old Indian who’s been in Antananarivo for 10 years.

The EU in June scrapped a 588-million euro ($804-million) aid package because Rajoelina refused to accept a compromise with his political adversaries.

To deal with the economic crisis, the government in September slashed its budget by 40 percent, cutting investment while maintaining salaries for civil servants and soldiers.

China Investment

“The instability is not helping the economy, especially as we can’t create some conditions like giving tax breaks to investors,” Trade Minister Freddie Mahazoasy said in an interview on Nov. 19. “Every dollar we get is being used to support services for the people.”

Spurned by Europe and the U.S., Madagascar has been able to attract investment from new partners such as China, according to Adolfo Brizzi, the World Bank’s country manager in the country. China’s Wuhan Iron & Steel Group earlier this year paid $100 million for iron-ore exploration rights in the country.

“The willingness of non-traditional donors and of Chinese companies to expand their business in the present environment despite uncertainties, offers the Government a partial alternative to maintain some economic activities and sustain its own costs,” Brizzi said in an e-mailed response to questions.

Opponents say the new constitution is aimed at extending the rule of Rajoelina. The EU, U.S. and African Union, which suspended Madagascar, don’t recognize Rajoelina’s leadership.

Lack of Transparency

The charter lowers the minimum age for presidential candidates to 35 from 40, and forces all candidates to be resident in Madagascar for six months before the vote, setting Rajoelina up to run and disqualifying Ravalomanana. Elections are scheduled for next year.

“The coup attempt is certainly not going to help restore an investment climate friendly to the private sector and the image of Madagascar on the international front has been further tarnished,” the World Bank’s Brizzi said.

To contact the reporters on this story: Hannah McNeish in Antananarivo via Johannesburg at 1934 or asguazzin@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg in Jerusalem at phirschberg@bloomberg.net.

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