Economic performance will be highly dependent on the uncertain political scene. A return to constitutional rule with broad domestic and international acceptance would restart inflows of aid and investment, upon which the economy depended before the political crisis. After shrinking by an estimated 2% in 2010, the economy is forecast to grow by 2% in 2011, largely on the back of sharply increased mining activity, particularly at the Ambatovy nickel and cobalt mine. In 2012 minerals will continue to drive growth, which should be further bolstered by the expected return of aid inflows. We expect real GDP growth of 6% in that year, although political uncertainty poses severe downside risks to this optimistic outlook.

The decision by the US to suspend Madagascar's trade privileges under the African Growth and Opportunity Act may have dealt a devastating blow to the island's textile and garments industry, which seems to be in terminal decline. Tourism is due to pick up slightly, in line with the likely improvement in political stability, although arrivals will remain below the levels recorded prior to the crisis. Moreover, the external situation increases the risks to our forecast. The ailing euro zone economies are traditionally major sources of tourists and investment.