The Mozambican Economy

Soft landing in 2015-16

Existing headwinds hurt short-term growth

Mozambique's long-term prospects remain upbeat largely as a result of the natural gas projects expected to come on-stream later this decade. Local officials reportedly expect more than US$ 30 billion will be invested initially in the sector, with the first exports of LNG due to start no sooner than in 2020. This is huge for a country whose GDP stands at more than half of that amount. However, Mozambique is currently facing several headwinds that will likely prevent it from expanding at the rates witnessed in the last decade (7.4% average). These include (1) a sharp decline in commodity prices, namely aluminum and coal (Mozambique's main exports) and (2) lower foreign direct investment in the country. Overall, economic growth is expected to slow to 6-6.5% this year and next (from 7.2% in 2014). It is worth noting however that, despite the expected deceleration, this forecast remains well above the 4.1% average growth that the IMF foresees for Sub-Saharan Africa in 2015-16.

Inflation is picking up after a sharp depreciation of the metical

The latest consumer price data showed that inflation is gradually picking up after recording a constant downward trend in recent years. This has been mostly felt in the food and non-alcoholic beverages segment, with prices in other items going up very modestly in 2015. The inflation rate surged to 6.27% YoY in November while the 12-month average stood at 2.83%. It compares with 1.93% and 2.56%, respectively, at end-2014. Prices are expected to remain under pressure in the foreseeable future chiefly due to the sharp depreciation of the metical against other currencies like the US$ (58%) and the ZAR (20%) this year. On the other hand, foreign reserves have fallen markedly in recent months. In 2015, the local authorities have faced (1) higher external debt payments, (2) the absence of capital gains in the extractive industry, as no noteworthy transactions have existed so far this year, (3) lower disbursements from foreign donors and (4) deteriorating external accounts.

Higher budget deficit puts pressure on external debt position

The budget execution report for the 9M 2015 period showed a lower execution rate for revenues (68.7% of the yearly target vs. 75.8% in 2014) and much lower capital expenditures (-40% YoY, with execution rate of 37.2%), with the latter due to delays in implementing projects expected for 2015. Overall, the budget deficit (after grants) has fallen 32% YoY to MZM 10,823 million (or US$ 210 million), which represents an annualized deficit of 2.4% of GDP. This compares with the 2015 budget target of a deficit of 7.5%. Meanwhile, the budget proposal for 2016 was recently presented to Parliament. The government expects real GDP growth of 7% and average inflation of 5.6% next year, which we believe to be on the optimistic side. It also foresees a deficit (before grants) of 10.2% of GDP and 6.6% (after grants), lower than the figures projected for 2015. Although the government is still planning to finance the majority of its expenditures with fiscal receipts (58% of the total), it is worth noting that public debt levels are expected to increase significantly from the levels seen in recent years. In particular, external debt is projected at 65.7% of GDP this year and 58.3% in 2016 (much higher than the 41.6% in 2014). The increasing concerns about the sustainability of the country's external debt position have reportedly been behind the downgrades in Mozambique's rating by the main agencies throughout 2015.