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Mozambique: Worsening

11 August 2016 Brian Peterson, Coface
Brian Peterson, Chief Underwriting Officer at Coface.

Brian Peterson, Chief Underwriting Officer at Coface.

Worsening of public finances and current account deficit difficult to avoid.

Strengths

• Favourable geographic location: long coastline, closeness to South African market
• Considerable mineral (coal), agricultural and hydroelectric potential
• Major gas reserves discovered off-shore (2010)

Weaknesses

• Limited diversification; dependence on raw material prices (aluminium and coal)
• Poor transport and port infrastructure seriously limiting its ability to export its raw materials
• High dependence on international aid and the South African economy
• Poor governance

Mozambique’s growth is expected to be lower in 2016 compared to 2015. The agricultural sector experienced particularly dry weather triggered by the climatic phenomenon El Niño. Industrial activity, most notably coal production, may feel the benefits of the new rail line linking the mines in the centre of the country with the port of Nacala commissioned in mid-2015.

But the recent disclosure of a huge amount of debt concealed by the government to multilateral institutions will severely impact direct investments and financial flows. The expected reduction in public capital spending will weigh on the construction sector, traditionally a strong sector of the Mozambican economy.

Weak external demand and the low price of the leading commodities exported by Mozambique (aluminium and coal) will limit exports contribution to growth. Consumer demand may be held back by a number of factors: surging inflation, fuelled by the impact of the drought on food prices, a hike in some public tariffs (specifically electricity) and the effect of the depreciation of the currency, the metical.

Worsening of public finances and current account deficit difficult to avoid

Since the major deterioration in the budget balance recorded in 2014, government has implemented budget consolidation measures, especially in the framework of the agreement reached with the IMF in October 2015.

The outcome of the scandal, linked to an undisclosed debt, may undermine these efforts, as main donors (IMF, World Bank amongst others) have suspended their financial support. Grants account for about 10% of budget revenues. Nevertheless, the deterioration of the fiscal balance may be limited by measures aimed at extending the tax base and improving tax collection.

The level of public debt (mainly external debt) has increased drastically and conditions of loans, less and less concessional, make the debt repayment burden heavier. The depreciation of the metical against the dollar is increasing State debt, of which more than 80% denominated in foreign currencies.

The government still needs to deal with its obligations arising from sovereign guarantees granted on the debts of major public companies. Then, the debt relating to the USD $850 million bond issued by EMATUM, a state-owned fishing company, has been exchanged against state bonds and the additional USD $1.4 billion guaranteed obligation is now included in official debt statistics. The risk on public debt distress is now high.

The current account deficit, linked to the country’s huge need for imports of capital goods and services for the construction of its infrastructure (gas and transport) will not be eliminated in 2016. Mining product exports are not going to increase given the weak growth in external demand and still low commodity prices.

Capital inflows will dwindle due to the loss of investor confidence in the country’s ability to deal with its substantial indebtedness. The downward pressures on the metical are likely to continue and the depreciation against the dollar in 2016 may be as high as in 2015 (30%) and foreign exchange reserves have declined to barely USD2bn (around two months of imports).

A continuing fragile political situation and weaknesses in governance

Frelimo has led the country since independence in 1975. Its representative, Filipe Nyussi, has been President since January 2015, after he won the elections in October 2014. Tensions with Renamo, the leading opposition party which fought against Frelimo during the civil war, are mounting. The social situation is also unsettled as a result of growing discontent among the population with the slow pace of progress in the fight against poverty and reducing unemployment alongside continuing political uncertainties that are off-putting for foreign investors.

Overall, the business climate in Mozambique remains difficult. Its performances as measured by the World Bank’s governance indicators are generally below those of its neighbours (with the exception of Zimbabwe). The country has dropped down the classifications, most notably for its control of corruption (151st out of 215 countries in 2014 compared with 124th in 2010), rule of law (164th compared with 129th) and above all political stability (down 49 places since 2010 to 141st place in 2014).

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