THE WAITING GAME

Mozambique 2013 | ECONOMY | REVIEW: ECONOMY

Growth was strong in 2012 as inflation tumbled, while the start of coal exports is expected to support GDP growth over the long term. The creation of a more inclusive economy is the challenge moving forward.

The quick start-up of coal production and exports buoyed GDP growth over 2012 at a time when the country faces declining foreign aid and reduced access to international financing. Strong FDI flows and a booming mining sector will keep growth on course, as all Mozambicans hope to share in the country's newfound mineral wealth.

GDP grew by 7.2% over the first half of 2012, reaching 7.5% by the end of the year, according to the IMF. As coal production began to roll, the extractive industry posted the highest growth figure at 39.25%, while its contribution to GDP totaled 3.4% in 2012, projected to grow to 4.3% in 2013. The transport and communications sector also registered strong growth thanks to the addition of a third telecoms operator and the addition of new airports and port infrastructure.

Inflation dropped sharply over the year, supported by lower international sugar and wheat prices, as well as stable fuel, transport, and utilities costs. A stable currency—themetical is currently valued at MZN30.75/USD1—also supported a reduced inflationary environment, with the annual inflation rate having been projected to drop to 2.5% by end-2012, according to the IMF.

Despite lower-than-expected government revenues over 2012, a windfall in the form of capital gains taxes, due to the sale of shares in a major gas project between private parties, of approximately MZN5 billion, or 1.25% of GDP, saw fiscal revenue exceed the budget.

FDI inflows, which reached $6 billion over the 2010-2012 period, have led to a temporary growth in imports in recent years, pushing the current account deficit (CAD) up to 25.8% of GDP in 2011. The government, however, continues to build up international reserves thanks to strong, mineral-related exports and the large capital inflows resulting from mega projects. Gross reserves, according to IMF data, now total 3.6 months of projected total imports or 5.5 months of non-megaproject imports. Moving through 2013, the continued contribution of coal production and exports and the implementation of large-scale infrastructure projects are projected to boost GDP growth to 8.4%.


COAL, MEGA PROJECTS, & THE CAD

Mozambique has remained on a steady path over the course of the global economic crisis, with a booming extractive industry, strong FDI pull, and stable trade flows mitigating the effects of lower aid income, reduced access to international finance, and a drop in global commodity prices. South Africa remains Mozambique's most significant trade partner, and despite the impact the global economic slowdown had on the country's southern neighbor, electricity and food exports travelling south haven't slowed. The development of the coal extraction industry will provide a double-pronged advantage for the economy, both attracting FDI and providing a boost to the export mix. Investment in infrastructure will also need to be ramped up, as transport bottlenecks threaten to limit capacity between Tete, where the country's coal extraction is focused, and the Port of Beira. The Sena line, running between Tete and the Port of Beira, is currently being upgraded to boost capacity from 6.5 million tons per year to 20 million tons. Vale, one of the country's largest investors, is also investing $5 billion in a new deep-water port at Nacala and a rail link to the Moatize coal basin in the western province of Tete, with public funds also committed to developing rail links of up to 800 kilometers in length to Moatize, which is also set to be integrated with the country's ports.

The CAD will continue to widen in the medium term as a result of the increased imports needed for the development of megaprojects, including the construction of liquefied natural gas (LNG) plants, set to begin in 2014 and financed by private-sector borrowing. Currently at 25.8% of GDP, this deficit is expected to widen to 26.5% in 2013 and exceed 40% in 2014. Increased coal exports as transport infrastructure begins to come online will reduce this figure to 34% by 2017, according to IMF data, while LNG exports could bring the current account into balance by 2020.

TRADE

Mozambique recorded an average trade deficit of $638.8 million over the four quarters of 2012. The country has run an average deficit of $347.8 million between 1980 and 2012, with 4Q2012 a record low, at $979 million, as capital imports support the development of mega projects. Despite a fall in imports of 2.6% over 1H2012 and the beginning of coal exports, Mozambique's bolstered export basket will not yield a trade surplus until at least 2020, when infrastructure to support coal exports is fully developed and planned LNG production begins. Coal contributed $196.4 million to export revenues over 1H2012, making it the second-largest export product after aluminum.

Mozambique's largest exports, which totaled $1.8 billion in 1H2012, also include marine products, electricity, tobacco, natural gas, and sugar. Pressure was also put on the country's major aluminum exporter Mozal over 2012, due to a drop in international aluminum prices. Global price fluctuations additionally contributed to a 10.5% drop in the export of products including wood, shrimp, and cashew nuts, while cotton and sugar both recorded growth over the first six months of 2012, according to the Bank of Mozambique.

Major imports include machinery and equipment, vehicles, fuel, chemicals, metal products, and foodstuffs. The country's main trading partners are South Africa, the Netherlands, Portugal, and China.

SECTOR BY SECTOR

Away from medium-term wealth generators such as the country's newfound coal and gas resources, another revolution is occurring in rural areas of Mozambique. Despite high growth rates in recent years and significant aid, the agriculture sector has been put on a new path in the form of a USAID-backed G8 plan to promote large-scale agribusiness in Mozambique and five other countries in the region. By 2015, the G8's New Alliance for Food Security and Nutrition plans to have invested $380 million in the country's agricultural sector, with the private sector expected to come up with a further $500 million. As part of the program, the Japan International Cooperation Agency (JICA) is currently involved in the ProSavana agricultural development project along the Nacala Development Corridor, an area that is also the focus of transport infrastructure developments in order to increase capacity and maximize volumes traveling between Tete and Nacala.

Rural regions are also benefiting from new wireless services that are being gradually introduced nationwide, a development that has allowed many to use mobile telephony for the first time in the absence of any meaningful fixed-line infrastructure. The opening up of the mobile telecoms sector in 2003 led to an increase in usage, with penetration rates now pushing 40% and the introduction of a new operator in 2013 further driving competition.

The tourism sector—set to grow 6% annually over the next decade according to the World Travel and Tourism Council (WTTC)—promises an alternative revenue stream for a large number of Mozambicans, although airport infrastructure currently restricts international visitation—51% of incoming tourists in 2010 were from South Africa. Maputo International Airport recently underwent an expansion, while work is also underway to build new airports in Pemba and Tete, efforts that have also provided a boon to the local construction sector.

The country's real estate sector, on the other hand, has been plagued by high prices in recent years due to a lack of supply that should be eased by developments in other sectors in the coming periods. Currently representing 4% of GDP, real estate developments have been focused somewhat on coastal areas as tourist numbers increase and mega projects begin to come into production.

A solid market economy will be the driver of the country's manufacturing sector over 2013. Mozal, Mozambique's largest aluminum producer, produces 580,000 tons annually, a figure that constitutes 30% of the country's total exports. Mozal is located in the Beluluane Industrial Park, just one of many special economic zones (SEZs) that have stemmed from the creation of the Special Economic Zones Office (GAZEDA) in 2007. Companies that are residents in SEZs are exempt from the 17% value-added tax (VAT) that many in the private sector have criticized for holding back business development. A nascent food and beverages sector promises manufacturing growth moving forward, with the lucrative South African market in local FMCG companies' sights. The government has also sought to boost the manufacture of tobacco products, with 99% of tobacco exports currently in raw form, lacking much value adding.

On the social side, the pharmaceutical sector was buoyed by the opening of an antiretroviral drugs manufacturing plant funded by the Brazilian government and mining giant Vale. As the country begins to produce its own antiretroviral medications for the first time, hopes are also high for the development of more significant training programs to cure Mozambique's chronic lack of medical personnel.

Mozambique cannot rest on its laurels while newly discovered mineral resources come online, and must work to attract FDI in the long term—the country fell seven places to 139 in the World Bank's Doing Business report in 2012. Increased government revenues, however, could go a long way to warding off the danger of decreased aid flows and lack of access to international financing as the world's largest economies begin to look increasingly inward. Making sure development is inclusive will be the biggest challenge moving forward.