Coface Group
Sao Tome and Principe

Sao Tome and Principe

Population 0.2 million
GDP per capita 1,569 US$
C
Country risk assessment
D
Business Climate
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Synthesis

major macro economic indicators

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 4.5 4.0 4.2 5.0
Inflation (yearly average) (%) 7.0 5.2 5.3 5.8
Budget balance (% GDP) -5.5 -6.2 -5.1 -3.9
Current account balance (% GDP) -22.6 -17.3 -14.1 -14.4
Public debt (% GDP) 68.9 81.2 90.3 95.5

 

(e) Estimate (f) Forecast

STRENGTHS

  • Considerable oil potential
  • Prospects for development of tourism sector
  • Supported by international donors
  • Links developed with Portugal and Portuguese-speaking countries (Angola, Brazil)
  • Dobra pegged to the euro

WEAKNESSES

  • Heavily dependent on public aid
  • Economy still dominated by agriculture and fishing
  • Poor business climate
  • Underdeveloped and weak banking sector (non-performing loans ratio of 30%)

RISK ASSESSMENT

Tourism and infrastructure projects still support the economy

Activity is expected to be more dynamic in 2017, buoyed by investments in the tourism sector and public infrastructure projects. Investment will receive a boost due to the moderate increase in demand from the Euro zone, the country's key trade and tourism partner. Indeed, tourism will play an increasingly important role in the economy (60% of total exports) and investments in the sector will be supported by public spending and by growing inflows of FDIs. The country's economic activity is constrained because of its geographic isolation and limited natural resources. Nonetheless, the agricultural sector will be supported by the gradual increase in commodity prices and demand for its products. The country mainly produces and exports cocoa, coffee, and palm oil.

Furthermore, international aid will also help reinvigorate activity and reduce the poverty rate (66%) thanks especially to support from its principal donors, Taiwan and Japan.

Inflation is expected to edge up because of the moderate increase in oil prices expected in 2017. However, it will remain well below previous levels (16% in 2010), specifically thanks to the currency peg of the dobra to the euro, in place since 2010. Household consumption (accounting for 75% of GDP) will, therefore, remain firm, due to the government's expansionary fiscal policy and moderate inflation.

 
Substantial twin deficits, still dependent on international aid

The budget deficit is expected to continue to decline in 2017 because of better performance by the fiscal system, which will boost income. However, low levels of government revenue mean there is still a need for international aid, agreed in the form of donations (particularly from Asian countries) or concessional loans (IMF, World Bank). Meanwhile, public spending is concentrated in infrastructure (transport, energy) and in other sectors such as tourism and agriculture, with the aim of boosting employment and competitiveness. The significant level of payment arrears, as well as the 3-year IMF loan in 2015 for USD 6.3 million, will still weigh on the country's indebtedness.

The current account deficit will remain stable, although still at a high level, because of the lack of export diversification. However, the higher price and production of cocoa (the main export) will help partly offset the rise in imports which is mainly explained by higher commodity prices and increased domestic demand. The improvement in the services balance, through tourism, will also help stabilise the current account.

The exchange rate against the dollar is also expected to remain stable, insofar as the currency is pegged to the euro. Moreover, the reasonable level of foreign exchange reserves (5.1 months of imports) means the dobra's peg against the euro can be maintained in the short term.

Meanwhile, the banking sector in São Tome remains weak. Most of the banks are poorly capitalised and there is a high non-performing loan ratio (about 30% of total gross loans). The sector is also highly concentrated, numbering only six banks, the largest being Banco Internacional de São Tomé e Príncipe, which accounts for almost 50% of loans and deposits.

 

 

An adverse business climate despite some degree of political stability

The absolute majority won by the IDA (Independent Democratic Action) in the October 2014 parliamentary elections brought political stability. Prime Minister Patrice Trovoada could thus be the first government leader to complete his term of office (in 2018) since 1990. Furthermore, the July 2016 presidential elections confirmed this stability since Evaristo Carvalho, member of the IDA, was elected to head the country. In this semi-presidential regime, the fact that the prime minister and the president are from the same party gives the government plenty of leeway to reform the country.

Finally the port construction project scheduled for 2019 (total estimated cost of USD 800 million, equal to 2.4 times GDP) will be partly funded with Chinese financial support to the tune of USD 120 million. As a result, relations with Taiwan, one of the country's main funding providers could become strained.

The country is in 162nd place out of 190 on the World Bank's 2017 Ease of Doing Business Index,with the business climate hampered by the difficulties in obtaining credit and in honouring contracts.

 

Last update : January 2017

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