The Mozambican Economy

The Mozambican Economy

Eventful start to 2016

Economic growth slows, but stays well ahead of SSA average

The latest news from Mozambique presented investors and market participants with mixed feelings about the country's current situation and outlook for the future. On the economic front, GDP figures showed that economic activity in the country slowed to 5.6% YoY in the last three months of 2015 and that real GDP growth for the year stood at 6.3%, below the 7.4% in 2014 (which is also the average growth of the last decade). This figure is in line with our estimate, but below the 7% expected by the government in the 2016 budget approved in November. It is also well ahead of the IMF's latest 3.5% average growth projection for Sub-Saharan Africa in 2015.

Tighter monetary policy to curb inflation

In terms of inflation, consumer prices picked up once again in January. This reflects the strong depreciation of the metical against the rand and dollar in the latter months of 2015 which translated into higher import prices. Although average inflation levels remain relatively low at 4.27% in January, it is expected to accelerate this year and stay above the local authorities' objective of 5.6%. This will likely require additional monetary policy tightening from the central bank on top of the three rate increases done in the last three meetings of 2015 and its latest move in February.

Twin deficits persist despite improvement in fiscal accounts

The latest data also showed that the country's twin deficits in its fiscal and external accounts persist. However, the 2015 budget execution report showed that the local authorities were able to reduce the budget deficit to 3% of GDP from 8.8% in 2014 (after grants). This was largely done by aggressively cutting capital expenditures and controlling current spending although we note the latter remains at an excessively high 60.9% of total spending (and wages at more than 1/3). Meanwhile, the current account deficit continued to deteriorate in the 9M 2015, standing at an estimated 45.3% of GDP (annualized) and above the levels seen in recent years. This largely results from lower FDI in the country.

Balancing the positive (LNG project) and negative (political tensions) news

Italy's Eni recently announced that Mozambique's Council of Ministers approved the development plan for the company's LNG project, paving the way for Eni to take the final investment decision on the project later this year. This approval relates to the first phase of development of 5 trillion cubic feet of gas located in Area 4 of the Rovuma basin, in the north of the country. It foresees the installation of a floating LNG facility with capacity of around 3.4 MTPA. This is a major announcement (and clearly positive news) for Mozambique. However, other recent news suggesting that political tensions have escalated lately is not so positive for the country. Reports that the army has increased its presence in the central and northern parts of Mozambique in order to disarm militias linked to Renamo (the opposition party) have recently led to the escape of Mozambicans to neighboring Malawi. The risk that these increased political tensions could result in the return of armed conflict to the country is something that the local authorities will need to avoid and eventually resolve. We believe the timing of these events is very unfortunate particularly bearing in mind the upbeat outlook that Mozambique continues to offer at the eyes of the local population and the international community as well.