Tanzania Business Forecast Report Q4 2008

Weathering The Commodity Boom

Tanzania looks set to weather the commodity boom reasonably well. We believe the country is past the peak of its large current account deficit and that the deficit is now set to narrow, even as the Tanzanian shilling continues to strengthen. Investment is also continuing apace, despite rising interest rates and high inflation, and we believe this will foster strong real GDP growth over 2008. The poor economic conditions of 2008 would normally reflect badly on Tanzania's ability to meet its debt obligations, but these are relatively small following debt relief, and we rate the country reasonably well for a non-oil exporting sub-Saharan African nation. On the political front, broad political stability is expected to be maintained, and we focus on the government's prospects for continuing to attract the high levels of foreign aid which presently support the economy.

While the whims of international donors are outside the control of Tanzania's government, we expect the authorities to pursue policies that increase the likelihood of the country receiving international aid. We expect the authorities to continue following the IMF's policy support instrument, and to refrain from conflict or anti-market policies, in its efforts to insure aid revenue streams flow. That said, the government has recognised the inherent volatility and unpredictability of international assistance and has begun policies to limit the negative impact of irregular aid flows, a move we believe is warranted.

On the economic front, we see growth in telecoms, tourism and mining continuing to provide short-term support to real GDP growth. Of these, the latter two will also contribute significantly to export growth, helping bring down the large current account deficit. This deficit has largely been fuelled by major increases in imports on the back of the high price of oil, but we believe 2008 has seen the peak of oil prices and that the cost of oil imports will slow from 2009 onwards. Alongside the recent decline in commodity prices, which we forecast to continue over H208, we believe we are also beginning to see a slowdown in inflation's upward march, helped by rising T-bill yields and shilling strength.

The business environment, while still suffering some major weaknesses, is improving. Ongoing efforts to bolster Tanzania's weak physical and labour market infrastructure include increased air routes, efforts to clear the crowded ports, and the increased dispersal of HIV/AIDS anti-retrovirals. That said, Zanzibar's dependence on the mainland for power was recently exposed when the undersea cable supplying electricity was damaged, cutting off the island's power supply for a month. Numerous other shortcomings still need addressing; property rights remain weak, skilled labour is in short supply and labour regulations remain high. Nonetheless, the country still manages to attract high levels of FDI on the back of the high growth opportunities, efficient commercial courts, long-standing political stability and a fairly competitive tax regime.