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Friday, May 20, 2011

Is privatization a potential solution for Cape Verde's continued economic growth?

Minister Cristina Duarte
While Cape Verde continues to experience positive economic growth, a potential prospect for future weakness was pointed out by Standard & Poor's, the American financial rating agency. While the sovereign debt of Cape Verde was awarded a B rating, S&P put the rating on negative outlook because of the high levels of fiscal indebtedness.

In fact, Cape Verde's debt burden is one of the highest among the African countries. According to Cristina Duarte, the Cape Verde Minister of Finance and Planning, the country's sovereign debt is projected to reach 81.5% of GDP in 2011, an increase from the 75.4% in 2010. However, Duarte suggests that this debt is "within sustainable levels" and is being managed within a disciplined process of infrastructure investment and development and supported under the auspices of the IMF.

The annual levels of deficit spending, which adds to this debt burden, will continue to escalate the sovereign debt. While it cannot be predicted with any certainty how high the debt will go, based on the minister's projections of the planned deficits, it would appear that the debt will reach a peak of at around 101-102% of GDP in 2015 before declining.

This situation probably implies that Cape Verde will find it increasingly difficult to raise the capital necessary to fund the next few years of deficit spending, or at worse, the cost of funding the future deficits is likely to rise. Yet, the spending is not extravagant by any means and the government appears to be effectively managing how and where these investments are utilized. Essentially, much of the investment is being made into infrastructure and projects which are likely to pay off with higher economic growth in future. Thus, if there are no calamitous, external economic shocks within the next 3-5 years and with continued foreign investments into the economy, Cape Verde will be well on its way to an increase in its ratings outlook and the ability to finance government spending on a much more favorable basis.

Luanda, capital of Angola
Still, the question remains regarding financing in the immediate future. Perhaps Cape Verde should take a page from the book of its African counterpart, Angola. On May 16, 2011, the Angolan government indicated that it would embark on efforts to partially privatize some of that countries largest public companies. You can read the coverage here:

Article on Angola =>> Angola to Privatize Largest Public Companies.

I had written about the idea of full or partial privatization in an earlier blog post. It makes sense to revisit the idea in this post. There are two primary and immediate benefits that are achieved from privatization:
  1. Competition & Reinvigoration. There is nothing like competition to boost economic output. Private investors can bring new capital, better management, fresh thinking and greater efficiency to an enterprise. It is a matter of survival. A prime candidate for partial privatization is TACV, the country's national airline. In this regard, the government could well learn from the airlines of the Caribbean, such as Air Jamaica and Caribbean Airways which at one time struggled with many of the same issues that TACV is dealing with at this moment. Air Jamaica did not survive but Caribbean Airways did. A private investor looking at the TACV example is likely to see strong parallels and may even see opportunities for partnerships where a government bureaucrat would not. TACV could easily be taken to another level of capability to compete with larger international airlines allowing the government to break down the protective barriers and greatly increase air traffic into the country with much more competitive prices. This is but one example of what is possible.
  2. Source of New Investment Capital. Given Cape Verde's very capable stock and bond market under the leadership of Bolsa de Valores, privatization can be easily accomplished by stock and bond offerings to local as well as foreign investors.

The Cape Verde government should now look to a broader range of possible approaches to maximizing the economic fortunes of the country and its citizens. The government has already been recognized for its effective governance and economic leadership among its African peers. But this should not be interpreted as a sign to rest in satisfaction or to be complacent about the work already done. Rather, it is a commendation to the intensity and focus of efforts that helped to raise this country out of the basement of "lesser developed countries." It is only encouragement for the real work that lies ahead to achieve economic prosperity for each island within this archipelago.

Update, May 31, 2011: After initially writing this post, I spoke directly with a government official and learned that the government of Cape Verde has extensively used privatization as a fiscal tool in past years. Some fifty publicly owned companies or projects have already been privatized and further privatization is planned. A likely candidate may indeed be the state owned airline, and that possibility has in fact been publicly proposed and discussed. Notwithstanding, I still strongly believe that waste and inefficiency should be rooted out at every opportunity.

Partial privatization also encompasses the process of identifying every instance where the government "produces" something and examining whether that product could be produced more efficiently by a private company with the appropriate controls and auditing in place.

From my perspective, it also includes within its scope, the elimination of government price controls and subsidies in the longer run. These too are forms of government intrusion into the space of private enterprise. Subsidies and price controls are the symptoms of other economic problems which should be solved directly and should engage private companies within a competitive, free market structure.

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