​Tales of Madagascar: The Downgrade Signal

My recent blog series navigated the complex terrain of Madagascar’s economy. It dissected the budget deficits, scrutinised the impact of IMF loans, traced the flow of remittances, and confronted the corrosive reality of corruption. Yet, last week’s news—the Coface downgrade of Madagascar’s country risk from C to D—feels like a culmination of these individual threads.

It is a signal that the press has largely misread, focusing on the static "business climate" rating while ignoring the darker reality of the country risk downgrade. 

A Convergence of Risk

When we look at the fiscal instability I have documented in earlier posts—the chronic cash flow problems, the delayed payments to teachers and healthcare workers, and the reliance on debt—the Coface downgrade is not a surprise; it is a confirmation. 

To understand why this matters, it helps to know who these entities are. Coface is a global leader in trade credit insurance. They provide the insurance that allows companies to trade across borders safely. When they downgrade a country from C to D, they are effectively telling their clients that the risk of non-payment or contractual default in that country has become significantly higher. 

Similarly, Standard & Poor's (S&P) is one of the world’s "Big Three" credit rating agencies. They assess the creditworthiness of sovereign nations, predicting the likelihood that a country will be able to repay its debts. By keeping Madagascar in the "speculative" (or "junk") category, they are signalling to global investors that the country’s financial health is precarious.

Now, these signals are converging. Investors, banks, and credit insurers are not merely looking at a single metric; they are looking at the predictability of the environment. When the state struggles to balance its books, when tax revenue is siphoned off by corruption, and when the machinery of government grinds to a halt, the risk profile inevitably shifts. This isn't just about abstract ratings; it’s about the cost of imports, the availability of foreign currency, and the willingness of international companies to open offices here and create jobs.

The Great Contradiction

This brings us back to a recurring theme : the deep-seated skepticism toward foreign direct investment. 

The country wants the factories and the jobs. Exports and the tax revenues that would finally allow the country to pay its  public servants a living wage. Yet, the country continues to treat those who bring the necessary capital as suspects. We demand development while simultaneously maintaining a regulatory and social environment that discourages the very people who could build it. 

Madagascar looks at nations like Rwanda, where Volkswagen assembles vehicles and BioNTech establishes vaccine manufacturing, and we wonder why that success remains elusive here. The answer is not a mystery. It is found in the Fraser Institute’s 2024 survey, which ranked Madagascar as the second least attractive country in the world for mining investment. It is found in the legacy of the old Doing Business rankings that highlighted our struggles with land rights, contract execution, and insolvency.

The Path Forward

The downgrade from C to D must be the catalyst that forces the country out of this contradiction. Madagascar cannot continue to demand progress while clinging to a system that makes investment an act of high-stakes gambling. 

If Madagascar is serious about solving the fiscal deficits and the corruption that plagues its domestic revenue, it must stop viewing foreign capital as a threat to sovereignty and start viewing it as a partner in development. A country that discourages investment is a country that chooses stagnation. 

The signal from Coface is clear. It is time to stop ignoring the warning and start building the solid, transparent, and welcoming environment that Madagascar’s future depends on.