Cameroon Business Forecast Report Q3 2009

A Tough Year Ahead

The outlook for the Cameroonian economy has darkened since our last quarterly Business Forecast Report, and we have revised down our real GDP growth forecast for 2009 to just 0.5%, and our forecast for 2010 to 2.0%, from previous estimates of 2.4% and 3.6% respectively. On the back of the weakening outlook for domestic growth and subdued oil prices, we are forecasting Cameroon's fiscal balance to flip into deficit in 2009, as revenues decline sharply and expenditure remains roughly constant. This has the risk of exacerbating social tension, though a coup in the style of Madagascar is highly unlikely in our view. More worrying on the political front is the potential for violent unrest in any number of Cameroon's neighbours to spill over into the country. Exacerbating tension across the region will be the global economic slowdown, and we continue to believe the Bank of Central African States will aggressively cut interest rates in 2009, in a bid to prop up the regional economy.

Social tensions on the back of rising food prices in 2008 could erupt again in 2009, with warning signs emerging that the government's plans to boost the agricultural sector have been ineffective.

External threats to security are also on the rise, with a possible attack by Nigerian militants on the presidential palace in Equatorial Guinea in February a worrying development for regional security.

That said, despite the risk of violent unrest, we believe President Paul Biya's regime remains firmly in control of the country, and only a severe recession lasting well into the election season in 2011 could significantly darken the ruling party's prospects of re-election.

On the economic front, the government is making efforts to improve the very weak business environment in a bid to diversify the economy away from the declining oil sector, but we are sceptical significant progress can be made over the next few years. In the short term, falling oil revenues will put any efforts to invest in infrastructure under pressure, doing nothing to attract foreign investment in the current climate. Besides falling investment, we believe exports - from oil to the rest of Cameroon's commodities - will drop significantly this year as global demand dries up, and these two factors will drag real GDP growth to the edge of contraction despite positive growth from the large consumer base.

Meanwhile, Cameroon's business environment is likely to remain challenging for foreign investors over the coming years. Firms are coming under pressure in the current economic climate, with metal producers delaying new investment and cutting production. The government has pledged to tackle the country's rampant corruption, but graft and nepotism continue to undermine the independence of state institutions and the judicial system. Furthermore, a weak transport system, worsening energy shortages and a relatively inflexible labour market are likely to impose considerable constraints on private sector investment going forward. The potential for escalating piracy and militancy also represents a risk to stability over the medium term.