Housing Finance in Sao Tome and Principe

Introduction

Sao Tome and Principe (STP) is a lower-middle income archipelago off the west coast of Africa sharing maritime borders with Equatorial Guinea, Gabon, Cameroon and Nigeria. It is the second least populated African country with a national population of just 199 910[1] over an area of 1 001km² (2017). The country gained independence from Portugal in 1975. The economy is based on tourism and a growing agricultural market built on exports of cocoa, coffee and palm oil. The country and its economy is highly vulnerable and subject to exogenous market shocks as well as environmental vulnerabilities resulting partly from deforestation and erosion. As a result and in conjunction with persisting poverty, weak government capacity and inadequate provision of basic social services, the African Development Bank (AfDB) has considered the country a ‘Fragile State’, since 2010. The GDP growth rate increased to 5,3 percent in 2016 from 4,5 percent the year before, on the back of foreign investment in construction and tourism sectors.[2] With such a small population raising sufficient financial resources domestically, in order to fund government spending is problematic, the general government gross debt as a share of GDP was at 92.8 percent as of 2016.[3]  The lack of domestic financial security has made the country highly dependent on external aid evident in the 2016 state budget which projected expenditure of STD(STP Dobras) 2.1 billion (US$ 100 031) of which 70 percent was financed by external resources.

The country is however primed for possible development on the back of large scale oil production which was planned for commencement in 2016 however no data is available for confirmation. This new economic asset presents both major opportunities, with expected inflow of oil revenue which could potentially reduce poverty and enable sustainable economic transformation and growth over the next decade; but also major risks, due to weak strategic, legal and regulatory frameworks, in addition to insufficient capability of public administration, with regard to the transparent management and effective and efficient utilisation of public financial resources.[4]  As a result of the potential and risk there has been involvement from international agencies such as the AfDB, the International Monetary Fund (IMF) and the World Bank to provide supportive technical assistance as well as funding to ensure the creation of capacity building strategies that develop economic and financial governance, strategic planning and programming, and create a more conducive environment for private sector activity.[5]

Given the lack of liquidity the government has developed a reform programme to increase revenues which is aimed for implementation in 2017. These include a 25 percent tax on locally produced alcoholic beverages, a regulation of the billing system, a regional taxation tribunal and lastly an update to the tax code, to include amongst other things a tariff on service delivery for non-residents. The financial sector is constrained as a result of capital shortages at a corporate level, a lack of bankable projects, and increasingly restricted foreign currency reserves.[6] Furthermore the government’s economic policies are not supportive of an emergent private sector. On a whole the business environment is not ideal due to high overheads relating to energy, maintenance, human capital, high interest rates, a lack of access to long-term financing and a weak judicial system.

Despite growth in the agricultural and tourism sectors there is an imbalance as imports remain high, captured at US$24.17 million (March 2017), compared to only US$ 1.67 million in exports.[7]  There is thus pressure for government expenditure to act as a primary economic driver. Due to high import rates domestic price fluctuations are tied to those of international prices, oil prices being the most notable exemption as fuel prices are fixed .[8] In 2010 in order to stabilise the currency, the STP Dobra was pegged to the Euro as such domestic inflation levels have converged to Euro area level. There is growth despite the economic pressures with a projected GDP growth rate of 5.6 percent for 2017[9], however all growth is burdened by national debt resulting in negative GDP account balances with the current account to GDP of -10.7 percent as of 2015.[10]

Current government agendas include a reform outlined in the 2016-2018 National Strategy Document, giving priority to i) the promotion of good governance, public sector transformation, sustainable and inclusive growth; ii) strengthening human capital, social service delivery, social cohesion, and social protection.  The government has entered into a three-year macroeconomic framework with the IMF under the Extended Credit Facility (ECF) for 2015-2018, which is in line with their programme to reduce the country’s high risk of distress.[11] Government has also indicated that they will prioritise highly concessional financing (loans with more generous terms than those on the open market), in accordance with the IMF’s new debt policy. Under this agreement the government has made a borrowing commitment of US$ 45.4 million until the end of 2018.[12] Furthermore the stipulation is that all new borrowing go toward projects in infrastructure and social spending with a high impact on development, including job creation and poverty reduction.[13]

Access to Finance

STP has a small financial system. With the Central Bank of STP (BCSTP) serving in a supervisory role over the national financial system and defining monetary and exchange rate policies in the country. Among other responsibilities, the BCSTP sells hard currencies and establishes indicative interest rates.[1] Commercial banks make up roughly 98 percent of financial sector assets, the majority of the eight banks[2], namely Afriland First Bank, Banco Equador, BISTP – Banco Internacional de São Tomé e Príncipe, Commercial Bank of São Tomé and Príncipe, Ecobank, Island Bank, National Investment Bank and Energy Bank, are foreign owned. Furthermore the sector is highly concentrated with the largest three banks holding almost 75 percent of total assets.[3] There is access to local credit to the private sector yet it is limited and expensive, though available to both foreign and local investors on equal terms.  However, the country’s main economic actors finance themselves outside STP.  The country is ranked 185^th in the Doing Business report 2017 for access to credit, due to high interest rates and a general lack of regulatory polices to ensure credit distribution.[4] Furthermore according to the report, in STP there is no credit bureau or credit registry, the lack of which means that there is no regulatory framework in which credit could be facilitated and monitored increasing the risk of providing credit.

The lack of versatility and portfolio variance is evident at the individual bank level. As some banks do not have credit exposure to all sectors and the size of the credit portfolios vary greatly. This is evident as in 2015, credit to the construction sector was provided mainly by one bank, and to a large degree the same was true for lending to tourism and manufacturing; this credit concentration by sector at the individual bank level increase banks’ vulnerability to sector-specific shocks as well as limiting the accessibility of finance across the board.[5] However, loans for construction, trade and consumption account for the largest proportions of credit by the economic sector.[6]

There is no state strategy to develop microfinance institutions and no formal regulatory framework to support the growth and development of the sector, which is almost nonexistent with only a single operator.[7] The high concentration of the banking system has led to limited competition. The system is composed of negative profitability, a high component of non-performing loans, and low capital adequacy.[8]  The banks are faced with capital deficiencies and a lack of feasible projects exacerbated by a dwindling availability and reserves of foreign currency. Banks thereby need to strengthen their risk-assessment criteria for lending, as the limited access to finance serves as an impediment to economic development and poverty alleviation.[9]

There is a substantial scope to improve the accessibility of a full range of financial services comprising of, payments, savings, credit and insurance; as only 48 percent of people have a saving account, only seven percent of Small and Medium-sized Enterprises (SMEs) have a bank loan and less than five percent are clients of consumer finance firms.

The government is in the process of structural reformation including the financial-sector strategy for 2017-20, which addresses the 2015-24 private sector development strategy and improving the software for public finance management system (SAFE).

Housing Affordability

Unemployment is at 12.6 percent with an estimated 61.7 percent impoverishment.[1]  Urban poverty is intensified due to limited employment opportunities particularly for youth as well as a reliance on employment opportunities concentrated around one urban centre.[2]

There is a very limited amount of information available around the cost of living and income levels of people in STP. A cost of living survey was conducted in 2011 by the International Civil Service Commission’s secretariat in STP, the sample size of respondents was very limited however the survey provides at least some idea of the situation. According to the study rental of a three bedroom house at the time cost US$ 2159.99 and a five bedroom house cost US$ 3 261.59,[3] in breaking down the disbursement of these rates apart from the actual rent the highest cost was for utilities. With a cost of US$ 234.15 and US$ 494.17 respectively. The expense of which serves as validation presented by business cost analyses which indicate that high costs of electricity for instance is a major barrier to business growth and investment in the country.

The Public Institute of Housing and Real Estate (Instituto de Habitação e Imobiliária, IHI), has indicated the cost of a newly constructed house to be US$ 30 000, they provide no indication of the size yet it is stated that the actual cost of construction is higher.[4]  In looking at property listings available through the International Bank of STP (Banco Internacional de S.Tome e Principe) the average cost of  a three bedroom house is around US$ 72 000. Considering the cost of housing and the limited and unclear system of housing credit, based on the perspective of higher and predictable incomes and the fact that two-thirds of the population (mostly employed in the informal economy), only the informal housing market, community savings and micro-credit schemes (for which there is no accurate detailed data) are accessible.

Housing Supply

STP has only one main urban centre, the city of Sao Tome, with 65.6 percent urban population and a population density of 208.2 per km²[1], 86.6 percent of which live in slum areas (2014/2015)[2]. According to a report produced by the National Institute of Statistics (INE) in 2012 the majority, 68 percent of homes were occupied by their owners, with only 14.6 percent renting, 16.3 percent living in free accommodation and 1.2 percent in other arrangements.[3]  According to this report as of 2012 there were 29 182 urban dwellings and 14 846 rural dwellings. The majority of which are one bedroom units at 43 percent, 37.8 percent two bedroom, 14 percent 3 bedroom, 3.9 percent four bedroom and 1.3 percent five rooms and more.[4] On average a family consists of 5.2 persons of which the majority live in a one to two bedroom unit.[5]  The level of development of these units is incredibly basic with 76.4 percent having no water on site and 57 percent units having no form of sanitation facilities, however there has been an improvement as in 1991, 80.1 percent of units had no sanitation facilities.

The composition of houses is primarily made of wood with 64.8 percent using wood for construction and 15.3 percent using reclaimed or salvaged wood. Only 19.2 percent of houses were masonry based. The dominance of particular materials used is indicative of how informal housing construction has been undertaken as well as how impoverished the population is. The expansion of informal housing is further indicated by the fact that while the use of masonry has dropped by 4.4 percent since 1991, the use of wood has increased by 12.1 percent over the same period. This trend is expressed further in the prevalence of Zinc as the primary roofing material. Houses are thereby incredibly rudimentary and informal.

Property Markets

The private sector in STP is small and underdeveloped, comprised primarily of micro-enterprises with emphasis on trade, fisheries, and tourism. The limitation of the economy, and its insularity and remoteness from the broader market within the African continent, form barriers to private sector development. Furthermore the regulatory, procedural and legislative framework obstruct private sector activity. STP is ranked 161 out of 190 according to the Doing Business report 2017 in registering property. The capacity of the Property Registry limits the efficiency of this process which would serve as a potential obstacle to investment. For which it takes seven procedures, 62 days and costs nine percent of the property value. Furthermore registration is done with the Finance Ministry, as well as at the Agricultural Ministry for rural land or at the Geographic and Registration Services for urban land, records are all paper, and property registry and cadastral agencies are not only separate but they use different identification makers for the same properties. As such and in conjunction with different land tenure types and forms of use, along with the difficulties in registration, there is duplication of registries with overlapping of ownership and confusion amongst types of entitlement, both within the formal and the informal real estate markets.[1] In dealing with construction permits STP is ranked 121^st, with 15 procedures over 104 days (which is comparatively less than regional counterparts’ average roughly 154 days) and a five out of 15 in the building quality control index.

These constrictions have been exacerbated by high interest rates and limited access by investors to credit coupled with poor physical infrastructure (port, airport, energy, roads and telecommunications).[2] Furthermore, there are few public private partnerships due in large to the lack of adequate legal and institutional structures. Finance, real estate and business services received 4.5 percent of the GDP in 2015, demonstrating a recognition for further investment in this sector yet it is not the dominant focus which given GDP spending at the time was agriculture, forestry, fishing and hunting which received 40.4 percent of GDP. This indicates the national focus on macroeconomic diversification and strengthening local primary production.

STP was rated with a credit rating of 15, for which its market is deemed ‘extremely speculative’, which is a low grading that doesn’t engender investor confidence.[3]

Housing Policy and Regulations

The Second Poverty Reduction Strategy Paper (PRSP-II), produced by the International Development Association (IDA) and the IMF, approved by the STP Cabinet in 2012, outlines four objectives namely: “(i) promoting good governance and public-sector reform, (ii) supporting sustainable and inclusive economic growth, (iii) enhancing human capital and extending basic social services, and (iv) reinforcing social cohesion and social protections, particularly for vulnerable groups”.[1]

In 2014 the land reform office of the Ministry of Agriculture, Fisheries and Rural Development announced plans to redistribute 1 500 abandoned land parcels for agricultural production in bid to combat poverty in Sao Tome.[2]  This program falls in line with the National Transformation Agenda as part of the STP Vision 2030 which specifies nine objectives:  reduce poverty in rural and coastal areas; promote youth employment through education and training; strengthen the health system; reinforce the public and administrative management tool; promote transparency and accountability in relation to the provision of Public Administration; strengthen internal security, public security and coastal security; simplify legislation and improve the business environment; implement infrastructure programs to support growth, and ensure environmental protection and control of operators.[3]

At the point of independence a portion of land was nationalised. Currently around 86 percent of the land is state owned though part of it may have contracts of concession, as such farmers have land’s usufruct the rights for which can be transferred however the land its self remains public. However, expropriation of land is allowed for projects deemed to be in the national public interest, but only occurs with adequate compensation.[4] The process of land registration is still being developed and as mentioned above is highly restricted by the outdated capacity of the system.

The STP government is attempting to encourage investment and as such is moving toward open competition in all sectors, to this end laws and regulations that relate to direct investment, including environmental rules and health and safety regulations, are non-discriminatory and apply equally to foreign and domestic investors. As an incentive STP tax laws reward Sao Tomeans who return home, while also containing provisions for attracting non-Sao Tomean personnel to live and work in STP.[5]

Labour, health, and safety laws exist but are not properly enforced. There are some reports that the process of terminating employment of unsatisfactory employees is cumbersome and that protective labour laws make it very difficult to bring skilled foreign-national specialists such as pilots, engineers, or architects into STP.

Housing Sector Opportunities

“International experience has shown that the impacts of large oil revenue inflows on the economy may be highly adverse and distortive. Therefore, STP urgently needs to start building safeguards against the so-called ‘Dutch disease’ in the form of structural changes and enhanced economic diversification in the non-oil sector, with a view to strengthening the country’s embryonic private sector. Policies to facilitate the creation of ancillary jobs in the non-oil sectors should complement this effort.”[1]

The STP Vision 2030, recognises the pitfalls of the current structure in place and seeks to redress issues of poverty, structural inadequacy, economic vulnerability and administrative incapacity. As such there is mass opportunities for development with the goal of STP becoming a geographic hub for tertiary services and trade. These goals are being driven largely by state funding, foreign aid and investment coming particularly from China which seeks to invest in port development. The intentions to open STP to foreign business were expressed within the 2015 Step in London Conference in which potential developments were flagged within various sectors of the economy. These include ecotourism, port development, business parks, energy sector growth and many other potential projects and reforms itemised within the conference notes.[2] This demonstrates the willingness of the government to engage further development.

There is a long road ahead for the development of STP, housing as of yet it is not noted as a priority as far as is expressed within the available data however the development of more sustainable and better serviced housing is part of the conversation particularly in regard to poverty alleviation. The intentions for market and economic expansion, expressed within the policies discussed within this profile, present a growth market for housing that will be necessary to support the needs of growing industries. Furthermore considering the goals of the PRSP-II one could potentially look to housing and international investment opportunities as a mechanism for sustainable and inclusive poverty reduction and economic opportunity creation for vulnerable groups. As such there is potential for future development depending on the capacity built into new financial structures being developed with the country, and the success of proposed international partnerships.[3]