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MOZAMBIQUE ECONOMIC UPDATE February/2014

H IG HL IG H TS :

Economy grew by 7.4 percent in the third quarter of 2014

Year ends with record low inflation

Central Bank lowers policy rate by 0.75pp

Marked decline in commodity prices could affect the economy

FRELIMO candidate Filipe Nyusi sworn in as President

Economy continues to register strong growth

In the third quarter of 2014, economic growth in Mozambique reached 7.4 percent. The average annual growth rate over the three quarters, also of 7.4 percent, is in line with expectations of growth for the whole year. Economic activity in the third quarter was led by the secondary sector with a growth rate of 10.8 percent. Manufacturing grew fastest within this broad category. The tertiary sector grew at an annual rate of 8.3 percent led by financial services and trade. Growth in the primary sector, of 6.6 percent, was led by extractive industries, although growth in this sector has decelerated compared to 2013, given low commodity prices and infrastructure constraints. Other traditionally fast growing sectors like construction and transport and communications have also decelerated.

Quarterly Real GDP Growth, y-o-y (percent)

Source: INE

Growth by sectors (%) 3rd quarter 2013 3rd quarter 2014

Agriculture -3.1 7.0

Extractive industries 4.3 11.5

Manufacturing industry -0.9 14.8

Electricity and water 8.1 9.2

Construction 23.3 11.3

Trade 3.5 7.5

Transport and Communications 11.5 3.1

Financial services 36.0 13.7

Other services 8.2 4.4

Total GDP 5.3 7.4 Source: INE

Agriculture had the largest contribution to growth in the third quarter of 2014, closely followed by manufacturing, together contributing to about half of the growth in the quarter. Other major contributors include financial services, trade and related services and public administration (together contributing to a third of the total growth). Given the relatively small size of the extractive industries, its contribution to total growth was small despite high year on year growth.

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Narrowing of the current account deficit

The current account deficit for the first 3 quarters reached US$ 3.7 billion. Compared to the first 3 quarters in 2013 this is a decrease of 7 percent, driven by a decline in the goods and services account. Excluding mega-projects, the current account deficit was US$ 2.5 billion, an annual increase of US$ 189.5 million. The merchandise trade account declined by 17.5 percent compared to the same period last year due to both an increase in exports to the tune of 6.3 percent and decline in imports by 5.8 percent. FDI in the economy in the three quarters was US$ 3.3 billion, a decline of US$1.6 billion compared to the same period last year. The decline in imports in the same period has been much lower, at US$ 256 million.

Current Account Deficit (US$ Billion)

Source: Bank of Mozambique

Merchandise Trade Balance (US$ Million)

Source: Bank of Mozambique

Decline in International Reserves

International reserves stood at US$ 2.9 billion at the end of December 2014. Since its peak in August 2014 at US$ 3.2 billion, there has been a continuous decline in reserves. The decline in reserves can be attributed to various factors like decline in aid, net sale of currency, losses in foreign exchange, public debt service and so on. This balance is equivalent to 4 months of imports, excluding mega projects.

International Reserves (US$ billion)

Source: Bank of Mozambique

Budget Execution Rates are higher than in 2013

State revenue by the end of the third quarter reached MT 116.1 billion, representing 75.8 percent of the target for the fiscal year. Contribution from megaprojects during the three quarters was MT 7.2 billion or 6.2 percent of total state revenues, a nominal increase of 26.5 percent compared to 2013. Only 50.7 percent of all grants projected for the year had been disbursed by the end of the third quarter. Total expenditures during this period reached MT 148.7 billion, a nominal increase of about 28 percent compared to the same period in 2013. Execution rates in both current and capital expenditures are higher compared to 2013. Execution rates at the sectoral level shows significant differences, with very low execution rates in the agriculture sector.

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State Budget Execution Rate for the three quarters of 2014

Actual Budget (millions MZN)

Budget Executed

(million MZN)

Execution Rate (Jan-Sep) %

State Revenue 153,075 116,103 75.8 Tax Revenue 132,262 100,315 75.8 Other Revenue 20,814 15,788 75.9 Grants 32,901 16,665 50.7 Total Expenditures 249,094 148,713 59.7 Current Expenditure 121,207 84,913 70.1 Compensation of employees 58,441 44,224 75.7 Goods and Services 26,656 18,764 70.4 Interest on Debt 6,069 3,689 60.8 Transfer payments 18,204 13,380 73.5 Subsidies 2,671 1,572 58.8 Other 9,166 3,283 35.8 Capital Expenditure 104,540 51,730 49.5 Domestically financed 46,260 27,024 58.4 Externally financed 58,280 24,707 42.4 Financial operations 23,347 12,070 51.7 Active 17,767 8,431 47.5 Passive 5,579 3,639 65.2 Financing 63,118 20,898 33.1 External financing 57,403 18,376 32.0 Domestic financing 5,715 2,522 44.1

Source: National Directorate of Budget, Ministry of Finance

According to the most recent IMF Policy Support Instrument, the 2015 draft budget will lower public spending from 41.9 percent to 36.4 percent of GDP. The reduction will be achieved both through an automatic decline in spending due to one-off activities in 2014 (EMATUM and election-related spending) as well as moderation in both current and capital expenditure. This expenditure containment would reduce the deficit from 10.6 percent to 7.5 percent of GDP. The floods that have affected the country in early 2015 may affect the fiscal outlook. The budget will need to be approved by the new government and sent to parliament in early 2015.

Year ends with record low inflation

Inflation was lower than projected in 2014, at 1.1 percent (year on year) in December. Inflation has been declining since April 2014. The yearly average in 2014 was down to 2.3 percent. Low inflation reflects in the strength of the Metical (for most of the year), good coordination between monetary and fiscal policy and a decline in commodity prices in international markets.

Inflation Rate, y-o-y (percent)

Source: INE (IPC Maputo)

Central Bank lowers policy rate

After a neutral stance for over a year, the central bank reduced the policy rate by 75 pp to 7.50 percent in early November. At the end of November 2014, growth in credit to the private sector was recorded at 24.3 percent. The rate of expansion in credit to private sector has been declining since its peak in September 2013.

Credit to the Private Sector

Source: Bank of Mozambique

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Standing Lending Facility

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Volatility of the Metical against major currencies

The Metical remained stable against US Dollar for most of the year, but there was some weakness in the local currency towards the end of the year, which has continued into the new year. While this weakness is also reflected against the Euro, the Metical continued strong against the South African Rand.

REER shows an increase over the last few years

The index of the real effective exchange rate remains high relative to its 2011/12 levels, suggesting a loss in competitiveness. After a decline in the first half of 2014, the index has risen again.

Nominal Exchange Rates

Source: Bank of Mozambique

Real Effective Exchange Rate (2010=100)

Source: World Bank Staff Estimates

While growth in Mozambique remains strong, major downwards risks persist

Global growth in 2014 was lower than expected and is projected to rise only moderately in 2015. Disappointing growth rates in the developing world are reflected in weak external demand and downward 2015 growth revisions in the most recent Global Economic Prospects and World Economic Outlook. Global growth will increase slightly to 3 percent while growth in Sub-Saharan Africa will stay similar at 4.6 percent, faster than Latin America and Europe but slower than South and East Asia. Current volatility in commodity prices adds uncertainty to the global outlook.

Commodity price forecast (2010=100)

Source: World Bank GEP

Growth in Mozambique is expected to remain strong in 2015, projected at 7.5 percent. Commodity prices remain a major external risk to growth in Mozambique. Projections for all relevant commodities for Mozambique have been revised downwards and depressed prices are expected for the reminder of the decade. Lower than expected coal prices and high transport costs have caused companies in the coal sector to suffer losses. Industry analysts argue that despite the decline in gas prices, Mozambique’s LNG projects remain viable. Floods in the center and north of the country may reduce growth from 7.5 percent to 7.0 percent, but additional information on the extent of the damage is needed.

Energy prices forecasts 2013-2025

Source: World Bank GEP

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Economic & Political News

IMF completes third review of the PSI

The IMF completed its third review of the Policy Support Instrument in January 2015. According to the PSI report, macroeconomic performance remains strong with low inflation in Mozambique. Despite the significant risks arising from uncertain prospects in the global economy, the report projects robust growth, driven by the expansion of the natural resources sector and investments in infrastructure. The report also argues that the main short term challenge would be to maintain this momentum while ensuring fiscal and debt sustainability. The report assesses program performance as mixed due to delays in implementing structural reforms, in particular related to public investment management and repayment of VAT reimbursements.

398 investment projects approved in Mozambique in the first nine months

The Government of Mozambique approved 398 investment projects from January to September of 2014 in Mozambique. Sofala followed by Cabo Delgado led the list of provinces with most investments, US$ 1.1 billion dollars in each province, followed by Maputo city with another billion. In sectoral terms Transport and Communications led approvals with 20 percent of the total investment, followed by Trade, with 14 percent and Agriculture and Agro-Industry, with 13 percent. In the mining sector 228 licenses were approved for exploration and extraction. Of these Zambezia province topped the list with 48 projects, followed by Cabo Delgado with 45, Manica (29) and Tete with 28 projects.

Floods in central and northern Mozambique

The center and north of Mozambique was affected by flooding in early 2015. In the northern provinces, electricity was cut for a prolonged period as storms affected transmission lines. The death toll from the floods has risen to 159, of which a majority is in Zambezia. The number of people affected by the floods is estimated at 157,172. The floods also affected traffic. Traffic along the main road connecting the country (EN1) was disrupted as well as traffic in the Sena line for 4 days, the main railway line used to export coal from Tete province. Other sectors such as agriculture and telecommunications have also been affected, which may lead to a revision of Mozambique’s growth forecast for 2015.

Developments in the coal sector

New contracts for coal mining

The Government signed in end 2014 coal exploration contracts with companies ENRC from Kazakhstan and Eta Star of UAE. ENRC expects to extract up to 25 million tons of coal a year and has plans to build a power plant in the region. The Government of Mozambique expects to sign a number of new contracts for coal mining in Mozambique within the two years.

Political News

Nyusi sworn in as President

Filipe Nyusi took the oath of office January 15, 2014 as the fourth President of Mozambique after winning the October 2014 elections. Frelimo’s win margin was lower than in previous elections with 57 percent of the votes. The main opposition party, Renamo, had a strong showing in the center and north of the country. Renamo has refused to recognize the presidential and parliamentary elections, and as of end January Renamo members had not taken their seats in parliament. Shortly after taken oath, the President announced his new Cabinet, including the merger of the Ministry of Planning and Development and the Ministry of Finance into a new ministry, the Ministry of Economy and Finance. The new ministry will be led by Adriano Afonso Maleiane, a former Governor of the Central Bank.