ECHOES OF WORLD ECONOMIC CRISIS SOUND IN GABON

UNCLAS LIBREVILLE 000048


DEPT ALSO FOR AF/C LISA KORTE
DAKAR FOR FCS/STEPHEN MORRISON
LONDON AND PARIS FOR AFRICA WATCHERS
ACCRA FOR USAID/WA

E.O. 12958: N/A
TAGS: ECON EFIN EPET EMIN EAGR GB
SUBJECT: ECHOES OF WORLD ECONOMIC CRISIS SOUND IN GABON

REF: 08 Libreville 423


1. SUMMARY: With an economy almost entirely dependent on the export
of raw materials -- mainly petroleum, manganese, and timber -- Gabon
has experienced significant recessionary effects linked to the
current international economic crisis. Private sector
decision-makers are taking a cautious approach to further investment
in the oil, mineral, and timber sectors. Short-term measures
include production slowdowns and holidays. With lowered projections
for export revenues, the government has already reduced Gabon's 2009
national budget by 28 percent and is likely to make further cuts.
Reductions in production, exports, and revenue have been exacerbated
by the failure of the government to carry out plans to diversify the
economy, strengthen the domestic agricultural system, and improve
governance. It remains to be seen whether the economic crisis may
trigger more serious economic reform efforts by the government. END
SUMMARY.

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PETROLEUM SECTOR
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2. Petroleum is the primary source of public revenue in Gabon,
making up 63 percent of the national budget and 51 percent of GDP.
Last year's precipitous fall in the price of a barrel of crude oil
from USD 147 in July to less than USD 37 by the end of December had
significant, immediate effect on Gabon's economy. The government
reduced the 2009 national budget by 28 percent before the end of

2008. In late January, plans for a second reduction were announced,
though the size of these further cuts has not yet been made public.
Moreover, the Minister of Mines anticipates an eight percent drop in
oil production over the next year, as well as a notable slowdown in
activities tied to production including exploration, transformation,
and distribution. According to the chief of a December 2008 IMF
mission to Gabon, "A significant decline in oil revenues could
affect growth over time through a slowdown in the non-oil sector and
public investment program."


3. The general consensus among oil industry representatives is that
the current worldwide crisis will not affect Gabon's petroleum
sector in the long-term, which was experiencing a gradual decline in
production even before the onset of the crisis. However, in the
short- and medium-term, management plans have been modified, with
many exploration and investment projects (particularly those from
smaller oil industry players) being suspended until a resolution of
the crisis is in sight. At least one industry representative,
however, the CEO of Total Gabon, is maintaining an optimistic public
outlook, proclaiming at a government-sponsored conference on the
crisis, "We are committed to being here [in Gabon] for the
long-term, and our actions in response to the current slowdown are
aimed at allowing us to fulfill that commitment."

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MINING SECTOR
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4. Gabon's mining sector -- dominated by the production of
manganese, a component of steel -- has been significantly affected
by the international economic crisis. Plummeting consumption and
production in the construction and automobile industries led to a
substantial decline in demand for steel in 2008. By October 2008,
worldwide steel production had dropped by twelve percent compared to
one year earlier, with overall production falling more than thirty
percent during the last quarter of 2008. According to the CEO of
French-controlled COMILOG, the sole manganese producer in Gabon, the
company was forced to respond to the fall in demand for steel and
its components by immediately adjusting production. Thus, the
company's monthly rate of production during November and December of
2008 fell from 600,000 tons to 300,000 tons, yielding an annual
production of 3.3 million tons for 2008 rather than the expected 3.6
million tons.


5. More dramatically, projections for domestic manganese production
for 2009 have been adjusted from 3.75 million tons to 2.5 million
tons. COMILOG intends to maintain the company's current workforce
in the short- to-medium-term, while taking other measures to reduce
production. These measures include a halt in production for
between four and six weeks out of the year (COMILOG already
instituted a temporary standstill in operations from December 22,
2008 through January 12, 2009),elimination of overtime, reduced use
of sub-contractor services, and the postponement of thirty percent
of planned infrastructure development projects. COMILOG's immediate
outlook is uncertain, with the CEO characterizing the current crisis
as being of "unprecedented scale...with a significant risk of
extending through, and even beyond, 2009."

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LOGGING SECTOR
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6. Gabon's logging sector has been rocked by the steep fall in
worldwide demand for raw lumber and finished wood products due to
the subprime mortgage crisis and slowdown in the U.S. and European
housing markets. China is the primary importer of Gabon's raw
lumber, destined to be transformed into plywood; China saw its sales
of plywood to the U.S. drop by fifty percent during the third
quarter of 2008. During the same period, France (the principal
destination for Gabon's finished wood products) saw a 44 percent
decline in new house sales. Gabon felt the direct impact of
decreased European and Asian demand through an eleven percent
decrease in its raw timber exports in 2008. Overall, raw timber
production fell by nineteen percent and the wood products sector
grew by only 2.5 percent during 2008. The downturn in Gabon's
logging sector was especially notable given the high growth in the
sector in recent years, including a 21 percent increase in exports
from 2006 to 2007.


7. Decision-makers in Gabon's logging sector have responded to the
crisis by slowing down or even halting production. Observers expect
foreign companies to reduce or close their operations in Gabon if
things do not improve during 2009. Trees that had been felled in
preparation for transport to market are now being left to rot in the
forest, a business necessity given the drastic fall in prices. For
example, the current sale price of a cubic meter of Okoume, a
species used to make plywood, is USD 400 below the cost of
production. In addition, the effects of the crisis have already
been felt by labor, as numerous logging companies have laid off
contractual workers as well as directing full-time employees to take
their annual leave ahead of schedule. Some companies have been able
to minimize the impact on their workforce by redirecting it towards
sawmill activities, as domestic demand has so far remained steady.

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AGRICULTURAL SECTOR
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8. While approximately 35 percent of the population is engaged in
agricultural production, agriculture only contributes about five
percent to GDP, and only two percent of arable land is currently
under cultivation. The Ambassador recently visited Woleu-Ntem
Province, the center of Gabonese agricultural production, and
witnessed first-hand the effect of the global economic crisis. A
trip to the SIAT rubber plantation revealed that the price for
rubber had decreased from 3 USD to 1 USD/kg. A visit with the
Planters Association showed that they had stopped producing coffee
and cocoa because of the decrease in prices. Instead, they are now
raising livestock (pigs). In spite of promised government funding
for the revitalization of the coffee-cocoa sector, the producers
themselves have yet to feel the effects of this program.


9. Gabon relies heavily on food imports, which account for about
sixty percent of domestic food consumption (reftel). The Minister
of Agriculture anticipates an increase of as high as fifty percent
for the price of imported food in the coming year. While the
Government of Gabon aims to increase agricultural production by 45
percent by 2015 in order to reduce dependence on foreign imports,
public sector investment in agriculture decreased from 2.5 percent
in 2005 to 1.4 percent in 2008. The Minister of Agriculture
recently announced the injection of USD 181 million over the next
five years for small agro-businesses in an effort to stimulate and
diversify domestic agricultural production. Despite high
urbanization, poor road infrastructure, and a weak capacity to
exploit the land, the agricultural sector is perceived as having the
potential to contribute significantly to economic diversification
and the fight against poverty in Gabon.

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GOVERNMENT'S RESPONSE
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10. Government authorities continue to consult with the IMF, the
World Bank, donor countries, and the private sector in designing
Gabon's medium- and long-term strategies for economic
diversification, seen as the key to dealing with periods of global
economic instability such as the current crisis. According to an
IMF official, Gabon has "indicated its readiness to adopt a number
of measures in the event that the global economic situation remains
unfavorable for an extended period...The current crisis underscores
the importance of diversifying the economy, which remains reliant on
the hydrocarbon sector." Such measures include investment in
infrastructure, agriculture, education, and health; a revision of
Gabonese tax law; the reduction of interest rates and greater access
to credit for small and medium-sized businesses; and efforts to
fight corruption and improve governance and the rule of law.


11. In the short term, the government has pledged to help improve
the purchasing power of Gabonese households through social welfare
programs, such as the supplying of free water and electricity to the
poorest families. In addition, January 2009 was marked by the
acceleration of the process of tax reimbursement for logging
companies, with the wait time reduced from ninety days to forty
days. Finally, government efforts to boost the petroleum sector
include the adoption of a mining and petroleum law designed to
clarify the legal framework concerning investment in these sectors,
the sponsoring of an international conference on geology and mineral
resources in Gabon in September 2009, and plans for a tenth round of
bidding for deep offshore blocks in the first quarter of 2010.


12. COMMENT: It is fair to say that Gabonese authorities have
access to sufficient, even abundant, analysis of the factors
impeding the country's economic development, as well as the steps
needed to resolve them. What is lacking is the political will to do
so. The current crisis, with its considerable effect on Gabon's
main sources of revenue and its population, has once again brought
to the forefront the need for economic diversification and improved
governance. If there is a silver lining to be found, it is that the
current crisis may compel Gabon's decision-makers to finally
initiate serious economic reform to avoid social and political
unrest. END COMMENT.

REDDICK