Risk Assessment for Financial Institutions in Cape Verde
Cape Verde, an island nation off the coast of West Africa, presents a complex risk landscape for financial institutions. With a C rating from Coface, the country’s corporate default probability is high. This uncertainty stems from its mediocre business climate, limited access to reliable financial information, and institutional framework weaknesses.
Business Climate
Cape Verde’s business climate receives a B rating, indicating mediocrity. While there are some strengths, such as:
- Efficient banking and telecommunications services
- Stable political institutions
- Exchange rate cooperation agreement with Portugal guaranteeing convertibility and a fixed rate with the euro
There are also significant weaknesses, including:
- Limited availability and reliability of corporate financial information
- Institutional framework weaknesses creating risks for intercompany transactions
Economic Dependence on Tourism
Cape Verde’s economy is heavily reliant on tourism, which accounted for over 50% of total export earnings before the COVID-19 pandemic. The recovery of the economy remains closely tied to the European economy, as most visitors come from Western Europe.
Inflationary Pressures and Economic Growth
The war in Ukraine has fueled inflationary pressures in Cape Verde, resulting in a widening current account deficit due to increased food and energy imports. Despite this, the country’s economy is expected to grow, driven by:
- An increase in exports
- Foreign direct investment
- Remittances
Deficits and Multilateral Support
Deficits are still large, but multilateral support from organizations like the International Monetary Fund (IMF) and the African Development Bank will help finance measures to protect families and businesses. The government plans to implement structural reforms to improve the business environment and attract private investment.
Political Stability
Cape Verde maintains political stability, with a coalition government in place since 2021. Prime Minister José Maria Neves has promised to work with the opposition party to address the country’s economic and social issues.
Conclusion
Financial institutions should exercise caution when operating in Cape Verde, given its high risk rating and uncertain economic outlook. However, the government’s efforts to implement reforms and attract foreign investment may help improve the business environment and reduce risks over time.