The Mozambican Economy: Stuck in a lower growth environment

The Mozambican Economy: Stuck in a lower growth environment

More stable economy

Mozambique’s economy has stabilized in recent quarters following a period of high volatility in the aftermath of the hidden debt revelations two years ago that triggered a sharp economic downturn. The latest official figures showed that economic activity in the country expanded by 3.2% YoY in 3Q18. This is roughly the same pace as in the first two quarters of the year. Yet, it remained well below the quarterly average of 4.6% in the last four years. Figures also showed that economic growth remained mainly supported by the mining, agriculture, retail and manufacturing sectors. All in all, the 3.3% annual expansion recorded from January through September makes the government’s recently revised projection of 4.1% for 2018 look overly optimistic.

Budget proposal assumes 4.7% growth in 2019

The government’s budget proposal for 2019 incorporates a 4.7% growth assumption, which considering the performance in recent years could (again) be excessive. In our view, the country’s economic outlook will mainly depend on further progress in the development of LNG projects as well as a gradual recovery in private consumption and investment. Lower inflation levels should also allow the Banco de Moçambique to continue easing monetary policy and, as a result, support growth. Still, we believe the pace of further interest rate cuts will depend on the central bank’s assessment of macro risks, namely those related to the sustainability of the country’s external position and the level of fiscal adjustments to be implemented by the government.   

Fiscal consolidation efforts should continue

The budget proposal also assumes a 0.1% reduction in the fiscal deficit (after grants) to 6.2% of GDP. However, before grants, the fiscal deficit projection actually stands at 8.9% of GDP (vs. 8.1% of GDP this year). The government expects a double-digit improvement in revenues, mostly from higher corporate income taxes, and a surge in grants. On the other hand, capital expenditures, which bore the brunt of the fiscal adjustment in recent years (16.3% of GDP in 2014 to 7.1% in 2017), are expected to recover to 10% of GDP while current expenditures advance at a more moderate pace. Fiscal risks remain elevated despite the recent implementation of key reforms to strengthen fiscal management, with pressure in the near future likely to come from rising domestic debt levels, an electoral cycle in 2019 and probable decentralization arrangements that could have relevant budgetary implications.

Restructuring agreement for Eurobond

The local authorities have taken important steps in recent weeks aimed to resolve the country’s current default situation. The resolution of these issues would help provide a clearer picture on the fiscal outlook of the country, help existing conversations with the IMF as well as improve investor confidence. The government announced that it had reached an agreement with creditors to restructure its US$ 726.5 million Eurobond maturing in 2023. This deal involves four creditors that control 60% of the Eurobond and would see them receive new paper maturing in 2033, with principal repayments starting in 2029. The new bonds would have a face value of US$ 900 million, with a coupon of 5.875%. Creditors would also receive 5% of future fiscal revenues from LNG projects in Area 1 and Area 4, although this would be capped at US$ 500 million a year. In addition, the government announced that it is negotiating an agreement with creditors of the syndicated debt that was arranged by Credit Suisse and VTB and that news on this matter could occur early in 2019.