Mozambique: Risk Assessment
Country Risk Rating
Business Climate Rating
- Favorable geographic location: long coastline, proximity to southern African markets
- Significant mineral (coal), agricultural and hydroelectric resources
- Huge offshore gas field discovered in 2010
- Under-diversified; dependent on commodity prices (aluminium, coal)
- Inadequate transport and port infrastructure, which constrains the country’s commodity export capacities
- Banking system constrained by government financing needs
- Unstable political and security environment
- Weak governance
- Difficult climatic conditions
Mediocre growth prospects
The economy is expected to rebound slightly in 2019, but will remain constrained by the crisis following the 2016 revelation of the government’s hidden debts. Construction, which was one of the sectors driving growth before the crisis broke out, is expected to continue to suffer from the government's financing constraints linked to the donor freeze on international aid. In addition, the state’s use of domestic financing sources, to the detriment of the private sector, is a drag on the banking sector. As a result, and despite monetary easing by the central bank, credit to the private sector is expected to continue to decline, which will impact the services sector, particularly in trade activities. With credit contracting, agricultural growth will remain held back by structurally limited access to credit. After acting as the main driver of economic expansion after the severe drought in 2016, the sector is nevertheless expected to continue to rebound. Fisheries and mining will also drive growth. While coal production growth is expected to continue to falter after the surge in 2017, it should remain robust. Graphite production is set to accelerate: in addition to increased production from the Balama mine, the Ancuabe and Caula sites are scheduled to start production in 2019. Inflation is expected to go up amid fading food price disinflation and rising energy prices (fuel and electricity). Prices will remain vulnerable to a depreciation of the metical.
Persistent Over-Indebtedness, Vulnerable External Position
In 2019, the budget deficit is expected to widen, in line with the increase in debt servicing costs and expenditure for the organisation of elections, despite measures to broaden the tax base, with a review of special tax regimes, and to reduce the state wage bill (which takes up about 55% of revenues). Capital expenditure growth will be limited by external financing constraints due to the high debt burden, which is mainly denominated in foreign currencies (almost 85% of total debt). The agreement to restructure a USD 726.5 million Eurobond, reached in November 2018, was a necessary first step towards exiting the debt crisis, but does not solve the over-indebtedness problem: external arrears remain high, and more defaults are possible. Monetary easing should allow the government to continue to use domestic financing, but the long-term viability of this solution seems limited.
In 2019, the large current account deficit is expected to widen in line with the deterioration in the trade balance, for while export growth is poised to slow, the production prospects (2022/23) for liquefied natural gas (LNG) will fuel demand for capital goods. Similarly, the services deficit will be affected by the need for technical services related to the development of these gas projects, while the income deficit will be hit by interest payments on debt and profit repatriation. Only the transfer balance will contribute positively to the current account balance. The deficit should, however, be financed by massive FDI flows, mainly into LNG projects. Despite the replenishment of foreign exchange reserves and stabilization of the metical in 2018, the very large current account deficit exposes the country to external shocks. The debt restructuring agreement may make it easier to obtain an IMF loan, which would support the external position. However, the lack of clarity on the use of the USD 2 billion of hidden debt is expected to continue to stand in the way of talks with the IMF.
A Precarious Political Climate, Tested by the 2019 Elections
Presidential, legislative, and provincial elections scheduled for October 2019 are expected to test the country's shaky political stability once again. The tensions inherited from the post-independence civil war (1975-1992) between the Mozambique Liberation Front (Frelimo), which has been in power since 1975, and the Mozambique National Resistance (Renamo), a former armed guerrilla group that turned into a political party in 1992, were rekindled by disputed municipal elections in October 2018. The first elections since 2009 to be held with the participation of Renamo (which took up arms again between 2013 and 2016 to challenge Frelimo's grip on power), the municipal elections ended with accusations of fraud and suspension of the peace negotiations launched in late 2016. The progress made, including the agreement on the disarmament programme for Renamo’s armed wing, has thus been put on hold. Fears about an outbreak of violence remain a key concern, even before the battle at the polls between President Filipe Nyusi, in power since 2015 and running for re-election, and the successor (not yet designated at the time of writing) of Renamo’s long-standing leader Afonso Dhlakama (deceased in May 2018). Such a scenario is not out of the question, given the country’s history of violence, the debt crisis and the perception of corruption, all of which are fuelling discontent. Terrorist attacks attributed to Islamist movements, mainly near the border with Tanzania, are an additional source of instability. In this context, the perception of weak governance and a difficult business climate (135th out of 190 countries in the 2019 Doing Business ranking) will persist.