Sao Tome and Principe Country Economic Forecast: 19 Mar 2012

GDP is estimated to have expanded by 5.1% in 2011, largely driven by tourism, construction and agriculture. We expect relatively robust growth of 5.8% in 2012, with solid investment growth helping to offset weaker demand from Europe. The fixed exchange rate (with the dobra pegged to the euro) implemented in 2010 is supportive of efforts to attract foreign investment, as well as helping to stabilise inflation. Despite this, the price of food and fuel, which accounts for a large proportion of consumer spending, rose sharply during 2011. Fuel prices are likely to remain high in the near term, although food price pressures are expected to moderate. We forecast CPI inflation of about 9.5% in 2012, down from an estimated 13.7% in 2011. While high oil prices are currently a burden, they will help to improve the fiscal and trade balances when the country begins to export oil, expected to be in 2015. The structural transformation into an oil-export oriented economy is likely to help boost the labour market. Combined with a likely increase in government transfer payments, consumption growth is expected to accelerate post-2015. Sao Tome and Principe is considered one of the more progressive countries in Africa, ranking 12th on the Ibrahim index of African governance. But it ranks 163rd on the World Bank's Doing Business survey, so further reforms and moves to tackle corruption by President Manuel Pinto da Costa (who took office in 2011) will be necessary to maintain the country's integrity once oil exports begin.