Economy

There is a Light

Economy

Mozambique is edging closer to the realization of its potential in the coal and gas industries, with immense reserves, both onshore and offshore, ready for exploitation.

Mozambique’s economic growth continues unabated, reaching 8% in 2014 and consequently continuing a trend of over 7% growth since 2010, bringing the figure to over $16 billion. According to the IMF’s World Economic Outlook from October 2014, projected growth for 2015 stands at 8.2%. This strong growth has been driven by heavy investment in the coal and gas industries, with the discovery of extensive unexploited reserves continuing to attract capital from diverse international sources. In preparation, massive infrastructure projects have been undertaken over the past decade to improve the transportation and logistics capabilities of the country, and policies have been enacted to ensure that long-term and inclusive economic growth will come as a result of this resource boom.

UNFORESEEN FACTORS

In 2012, inflation had declined to 2.1% from a much higher 10.4% in 2011, a positive development attributed to lower food prices. However, the inflation rate for 2014 was 4.2%, the figure climbing since 2013, according to World Bank data. In both years the country was affected by devastating floods in the south of the country and along its major rivers. This unfortunate turn of events was repeated again in 1Q2015, an ominous pattern that will continue to somewhat hinder the key economic sector of agriculture. However, inflation has broadly remained below the government’s predicted rate of between 5-6%, in part because of lower global commodity prices in 2014. The consumer price index for Maputo, Beira, and Nampula was 1.93% for the year, with the metical staying stable on the domestic exchange market and Bank of Mozambique policies remaining focused on sustaining liquidity. The metical devalued against the dollar by over 5% in 2014, but has been performing better against the rand in South Africa, its primary trading partner. Despite warnings from the Central Bank that the recent floods could accelerate inflation due to reduced mobility and trade, the consistent policies followed by the economic regulators in recent years suggest that macroeconomic targets for 2015 will be met. The monetary base expanded by over 20% in 2014.

SPENDING TRENDS

The economy’s elevated rate of growth, based as it is on its vast proven gas and coal deposits, attracts high levels of foreign direct investment. The various megaprojects being developed in these sectors are capital-intensive, requiring funding for the purchase of technical equipment, electronics, and supplies such as refined petrol. For this reason, Mozambique has the highest current account deficit in the world, standing at 46% in 2014, according to the World Bank. However, the fact that the bulk of this deficit has been paid for by investment from abroad does not suggest the deficit will undermine broader macroeconomic growth once resource exports begin in earnest.

The deficit will widen as imports of these crucial materials continue to support the construction of LNG facilities and the nation’s coal export infrastructure. However, a current account surplus has been predicted over the coming decade as the country’s ambitions become reality. Additional costs that are exacerbating the deficit include a raised wage bill, and investment in maritime security following a 2013 bond issue for tuna fishing and private patrol services on the Mozambique Channel. Maritime security in the region is also being advanced by economies such as India and China, whose investment in the country’s gas reserves necessitate guaranteed access to its ports. Costs related to the general elections have also increased public spending, resulting in increased debt. Public spending as a share of GDP stood at over 40% in 2014.

IMPORT-EXPORT

Non-crude petroleum products represent around a fifth of imports, coming in at approximately $1.12 billion in 2012, indisputably the principal imported commodity. The remainder of the country’s diverse import mix comprises much smaller volumes of products, ranging from vehicles to refined metal and construction materials, fertilizers and advanced chemicals to medicines and rice, wheat, and meslin. On the sales side, aluminum has dominated the country’s export basket for over a decade, as output from the Mozal smelter, established in 2000, laid the foundations for other major foreign investment projects. The company contributes substantially to GDP, at approximately 7%, and annually produces over 550,000 tons of aluminum ingot for export via Europe to other markets such as Asia. Midal, a leading international aluminum cable manufacturer, set up operations close to the MOZAL facility in 2013. This was a pioneering development in a sector that had previously been geared exclusively toward exports. Though majority-operated by BHP Billiton, Mitsubishi, IDC, and the government of Mozambique are all shareholders in the company. Aluminum represented around 24% of total exports in 2014, but is expected to drop to 21% in 2015 as coal emerges as a more important element of the export mix. The country is projected to have joined the top-ten coal exporting nations in the world by 2017, as its untapped coal reserves, estimated at around 20 billion tons, are exploited.

Vale, the Brazilian mining firm, has invested in a new coal terminal valued at over $6 billion, as well as a 900km railway to augment their extractive industry. Over the course of 2015, coal is projected to replace aluminum as the leading export item for Mozambique, rising from a 17% share of the total in 2014 to an estimated 27% share, and will likely maintain this position until the country’s LNG capacities are realized later in the decade. Coal exports are expected to reach over 40 million tons within three years, with the sector to be valued at well over $700 million. Investment continues to flow in from diverse sources, including Indian and Japanese groups, both public and private, aiming to secure future supplies for their electricity generation networks. In general, the sector is showing a lot of promise, with Mozambique reaching compliance status on the Extractive Industry Transparency Initiative (EITI), confirming its reputation for the responsible exploitation of its natural resources.

HIGH VOLTAGE

Mozambique’s government is fortunate to not have such worries. Since the completion of the colonial era Cahora Bassa hydroelectricity project on the Zambezi river, the country has had a considerable electricity surplus. Sources of electricity generation will become increasingly diverse over coming years also, as Ncondezi, the prominent power development company working out of coal-rich Tete province completes work on its coal-fired power plant. The facility will be set up in phases of 300MW, with the first stage set to be complete by 2017. Ultimately, capacity will reach as high as 1,800MW. Vale is also working to construct a coal power station of a similar capacity, and a gas-fired plant is set to come online in Maputo later in the decade also.

IN A DAY’S WORK

Agriculture remains the principal economic sector, with swathes of arable land across the country yet to be effectively cultivated. For a country of such vast area, Mozambique is relatively sparsely populated. Approximately 80% of the workforce is employed in agriculture, and the sector contributes almost a quarter of GDP. There are 3.8 million farms across the country, with the vast majority of these being subsistence farms. Difficulties related to the transport and export of goods due to insufficient infrastructure have held back the development of large-scale farming. However, prospects for the resolution of this issue lie in the construction of transportation solutions for the extractive sectors, which could also be used to facilitate the export of agricultural produce. Tobacco is one of the main and most profitable crops. Sugar cane and fishing are other key segments.

While the majority of the working population is employed in agriculture, many more jobs could be created as a result of the emerging gas and energy projects, but traditionally these segments have not provided much employment. The export of aluminum and activities in extractive industries typically provide fewer, more specialized positions. Informal employment is estimated to account for over 90% of the labor market, which numbers 11.6 million individuals. Unemployment stands at around 8%, with a higher proportion of the 300,000 young people that enter the labor market each year going without jobs. The growth of the economy and any accompanying increases in employment options have not had the desired effect on reducing poverty, however. The country’s per capita income stood at just one-third of the average for the Sub-Saharan region in 2013. Despite these considerable challenges, the fortunes of the populace could change when the megaprojects that are still being developed finally come online. The support services and auxiliary industries that will spring up around the expanding coal and gas sectors will offer a broader distribution of opportunities, fostering more sustainable economic growth than that of the past decade.

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