MADAGASCAR RECEIVES QUESTIONABLE SAUDI INVESTORS

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000356

DEPARTMENT FOR AF/E - MBEYZEROV
DOC FOR BERKUL
TREASURY FOR FBOYE

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV ECON PREL MA SA
SUBJECT: MADAGASCAR RECEIVES QUESTIONABLE SAUDI INVESTORS


1. (SBU) SUMMARY: A group of questionable Saudi investors has signed
an agreement with Madagascar's High Transitional Authority (HAT)
allegedly to invest 2 billion dollars (over 20% of GDP) in
Madagascar. To further sweeten the deal, the Saudi investors plan
to export large quantities of staple commodities to Madagascar,
which the HAT asserts will lower prices by 40% - and put them in
direct competition with local producers and existing importers,
increasing pressure on the foreign exchange market unless the
promised FDI inflows offset the resulting increased demand for
foreign currency. The deals have aroused considerable suspicion
despite HAT-encouraged positive media coverage, both for their
questionable economic sense and for their new engagement with
historically distant Saudi Arabia. The whole thing sounds bogus to
us, amounting to little more than a PR effort to portray the
isolated, illegitimate HAT as not entirely without foreign friends -
or hope. END SUMMARY.

MASSIVE INVESTMENT PLAN LACKS DETAIL
--------------

2. (SBU) A delegation of three Saudi investors visited Madagascar
from May 2 to 7, and were personally welcomed on arrival by HAT
Minister of Foreign Affairs Ny Hasina Andriamanjato. The group
consisted of Sheikh Nasser Abdullah Al Mushaeghay, President of the
Union of Saudi Investors; Najee Khalil (a Sudanese National),
Vice-President of the same organization; and Ayman Suliman, Chief
Executive of Click Holding. They announced their intention to
invest in hotels, communications, energy, cement, agro-business, and
oil refining, with projects totaling up to USD 2 billion. HAT Prime
Minister Roindefo Monja signed a partnership agreement with the
investors on May 6, declaring that the deal does not break any
current agreements or obligations, and will instead compliment other
efforts to develop the country. A Malagasy-Saudi Chamber of
Commerce reportedly will soon be created to promote the partnership
between the two countries.


3. (SBU) If delivered, A USD 2 billion investment in these sectors
would have a significant impact on Madagascar's balance of payments
since it represents over 20 percent of GDP. The highest rate of FDI
inflows previously seen in Madagascar was in 2007, at around 10
percent of GDP, in connection with large foreign-operated mining
projects. As happened in 2007 and 2008, this influx of foreign
currency would cause the ariary to appreciate, and drive down
inflation - but it would not overcome the Malagasy economy's low
absorption capacity in terms of labor and capital goods. As a
result, much of the investment would lead to increased imports of
capital goods, further widening the current account deficit.

LOW-COST STAPLE GOODS
--------------

4. (SBU) While details remain suspiciously sketchy on the investment
front, a near-term plan to import large amounts of low-cost staple
goods appears to be moving forward. The Saudis plan to begin
exports to Madagascar by May 20, starting with 25,000 tons each of
Saudi Arabian cement, Egyptian cooking oil, Brazilian sugar, and
Turkish flour. These large imports of staple commodities will, in
some cases, dramatically increase the supply on the local market and
result in lower prices; the HAT Government predicts a 40% drop.
These suspiciously round figures represent a 5-fold increase in
imports of flour over 2008, a 55 percent increase in cooking oil, a
21 percent increase in sugar, and a 6 percent increase in cement.
To ensure that these imports will actually impact local prices, the
Saudi investors have also requested a tax exemption from the HAT
Government.


5. (SBU) If these quantities of imports do materialize, local
producers and local importers will not be able to compete,
particularly if the imports benefit from a tax exemption. As a
result, local businesses will likely be driven out of these markets,
and the politically volatile former TIKO monopoly (of former
President Marc Ravalomanana) will simply be replaced by a de facto
foreign monopoly. In addition, the receipts of the sales will need
to be repatriated to Saudi Arabia, typically within 90 days after
the delivery. There will thus be increased demand for foreign
currency and pressure on the foreign exchange market, leading to a
further depreciation of the already-falling ariary (it has lost 21.6
percent of its value against the US dollar in the last year alone).
If the current account deficit caused by the increased imports is
offset by the promised investment inflows, there will be less threat
of depreciation, but the two elements of this deal (the USD 2
billion investment and the staple goods imports) do not yet appear
to be firmly linked.

A HEALTHY DOSE OF SKEPTICISM
--------------

7. (SBU) COMMENT: Skepticism is further heightened by the fact that

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these three investors, and their respective organizations, are
complete unknowns in Madagascar. They travelled on commercial air,
do not appear anywhere on the Internet, and were unable to convince
even the most pro-HAT newspaper that their offer was truly
legitimate; in a country that is already suspicious of the Arab
world's intentions, there have even been allegations (as yet
unsubstantiated) of ulterior motives including money laundering or
other illicit financial activities. PM Monja responded to these
rumors publicly, denying that the investments had any connection
with money laundering, but Post shares public skepticism pending the
appearance of the promised goods and investment. In addition, for
these goods to lower prices in the domestic market by the promised
40 percent, they will likely have to be sold at a significant loss -
making it probably that they are intended as a show of good faith to
buy support for the as yet unknown terms of any future FDI. In the
end, if there is anything more to this deal than a ham-handed PR
stunt by the isolated HAT, we will be surprised. END COMMENT.

MARQUARDT