Opportunities remain for business in Mozambique

This year has been a tough one for Mozambique, with those outside the country still concerned about its ability to navigate its challenges successfully, while those inside the country are much more optimistic. So for risk managers looking at the country, what are the factors behind the concerns? And at what point does the balance tip between investment and walking away? An International Monetary Fund (IMF) team headed by Michel Lazare visited Mozambique in September to assess recent economic developments and discuss government policies to restore confidence and underpin economic stability. At the end of his visit, Mr Lazare issued a statement, in which he notes: “Mozambique is facing a challenging economic environment. Growth has been on a declining path and is currently expected to be 3.7% in 2016 (down from 6.6% in 2015), which is significantly below levels observed in recent years. hide “Inflation has risen sharply, reaching 21% on a year-on-year basis in August, fuelled by a significant depreciation of the metical (about 40% since the start of the year). At the same time, a significant decline in imports has been more than offset by a weakening of exports, foreign direct investment, and donor financing. “This has maintained pressure on international reserves, which have continued to decline. The discovery in April 2016 of previously undisclosed debt worth $1.4bn (10.7% of GDP), combined with the impact of the exchange rate depreciation, has led to a substantial increase in debt ratios and the debt service burden.” Mr Lazare adds, however, that all is not lost: “Against the backdrop of these challenging circumstances and continued significant downside risks to the economy, the mission welcomed the economic policy measures adopted by the government since June.” On the fiscal front, a revised 2016 Budget was approved by parliament in July, including measures to contain non-essential spending. On the monetary front, the central bank raised reserve requirements and its benchmark interest rate by 300 basis points, to reduce excess liquidity. Critically for business, the government has “appropriately allowed the exchange rate to fluctuate to help restore balance between supply and demand for foreign exchange and support the needed ongoing balance of payments’ adjustment, while limiting the loss of international reserves”, explains Mr Lazare. He continues: “Nonetheless, with inflation still rising and the metical depreciating, further policy tightening is needed to safeguard macroeconomic stability. Notably, the 2017 draft Budget is set to further consolidate the state of public finances while preserving critical social programmes. On the monetary side, the mission welcomed the central bank’s intent to continue adjusting its monetary stance to help reduce inflationary pressures. “A solid track record of implementation of sound macroeconomic policies and an effective initiation of the audit process in the near term would help to create the conditions for a possible resumption of programme discussions with the IMF.” Downward risks The World Bank, too, has voiced concerns. World Bank projections place growth at 3.6% for 2016, with significant downward risks. It says: “Despite these unfavourable short-term prospects, long-awaited LNG investments will shape the recovery, with growth projected to reach 6.9% by 2018 as the two Rovuma basin gas mega-projects come on stream. Foreign direct investment inflows will support the external position, with international reserves expected to recover, although at a slow pace, to 3.3 months’ cover for non-mega-project imports by 2018.” The discovery in April 2016 of previously undisclosed debt worth $1.4bn, 10.7% of Mozambique’s gross domestic product (GDP), combined with the impact of the exchange rate depreciation, has led to a substantial increase in debt ratios and the debt service burden. The World Bank believes: “As a result, the fiscal position is likely to remain under stress until the end of the decade. The startup of gas mega projects will not yield significant fiscal revenues before the large external debt obligations fall due. Some respite to government finances might come in the form of mega project-linked capital gains taxes, but amounts and prospects are uncertain. Hence, reforms aimed at deep fiscal consolidation will be required and remain a priority in the medium term.” It warns that the authorities face hard choices in pursuing a recovery and re-establishing confidence. A thorough review of the state enterprise sector, including liquidation and sale of non-strategic assets, should be considered as an option to increase government resources and reduce fiscal risks. The World Bank suggests re-engagement with the IMF and the donor community will also be crucial to reinforcing government finances, which are crippled by the country’s debt burden. Concrete steps in transparency and accountability for the hidden loans would be an important milestone, including an independent international audit. “In the short term, adverse climatic conditions, brought on by La Niña, are a risk. Should this materialise, the costs of flood damage and impact on food production would pose a major challenge to food security and livelihoods, especially in rural areas,” warns the bank.

Opportunities remain for business in Mozambique

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