Mozambique: Risk Assessment

Country Rating¹

Rating: B

Business Climate Rating¹

Rating: C

Risk Assessment²

Growth fuelled by foreign investment
Economic growth will remain strong in 2011. Thanks to continued foreign investment in the mining sector and infrastructure, investment will again make a very strong contribution to growth. Hospitality and catering will benefit once again from a recovery in tourist activity. Farm production is expected to grow provided the weather is good.

Subsidies facilitate keeping the social peace
Inflation - after surging to 14% in 2008-2009 with the metical depreciating against the rand and farm prices soaring - will be unlikely to exceed 5% in 2011. The tightening of monetary policy, stabilisation of the metical, and the subsidizing of basic necessities will take care of that. Conversely fiscal policy is expected to remain accommodating with the development of social aid and the rise of subsidies for bread petrol, water, and electricity after the bloody riots in September/October 2010 Their cost will largely depend on trends in exchange rates and international prices. Despite the increase in ordinary revenues attributable to the improvement in tax collection and the growth of payments associated with foreign investments, the proportion of aid in the revenues will again reach 40%.

Despite the growth of exports, international aid remains essential
The current account deficit will remain large despite improvement in the terms of trade. Although sales abroad - not only of aluminium and coal but also of gas and electricity to South Africa - will doubtless grow, imports will increase even more. Purchases associated with implementation of mining and infrastructure projects will develop while firm prices will inflate the bill for oil and agricultural commodities, which to a very large extent are imported from South Africa. Payments to foreign service-providers and dividend payments to foreign investors will increase. The inflows of grants, concessional loans, and foreign investments particularly from Australia, Brazil, India, and China are essential in covering the external deficit. With the IMF approval the authorities have decided to resort to non-concessional financing and partnerships with the private sector to accelerate projects with export-potential like those in electricity and transport. At this juncture a €700 million credit line (only half of which is concessional) has already been concluded with Portuguese financial institutions. This transaction is expected to result in an increase in foreign debt (essentially public) whose repayment is expected to be facilitated by the development of exports. The situation would be infinitely more comfortable however if capital flight could be capped.

Political stability, but with governance still difficult
Facing a weakened, disorganized opposition, President Armando Guebuza and his Frelimo Party (Frente de Libertação de Moçambique), re-elected in October 2009 to lead the country, exercises well-established power. The confusion between the party in power and the State is, however, a source of concern to donor countries. The performance of Mozambique in terms of corruption, regulations, respect for law and order, and administrative efficiency has been poor. But the progress made on crucial issues - education, water conveyance, and health - albeit starting from a low level, in conjunction with relatively good performance in the allocation of funds, has, however, prompted donors to maintain the flow of financial aid.
 

Strengths

• Subsoil rich in minerals (coal, gold, bauxite, tantalum)
• Favorable geographic situation, (maritime access for landlocked countries of southern and central Africa)
• Extensive hydroelectric potential
• Political stability
• Privileged geographic situation: long Atlantic coastline, proximity to the large South African market
• Support of donor countries

Weaknesses

• Low productivity of the farm sector (80% of the population, 20% of GDP)
• “Megaprojects” have a limited effect on the rest of the economy. 172nd out of 177 on the HDI
• Heavy dependence on international aid and the South African economy
• Regional disparities: the north and the center at a disadvantage compared with the south and the coast
• Limited diversification: heavy dependence on aluminium demand and prices
• Pervasive poverty, malnutrition, and inequality