RaboResearch - Economic Research

Country Report Mozambique

Country Report


Flag Mozambique

Mozambique’s economic growth remains strong, but increasing fiscal imbalances might become a challenge in the medium term. A ceasefire agreement between Renamo and Frelimo represents a significant improvement of domestic security and stability.

Strengths (+) and weaknesses (-)

(+) Natural endowments

Large gas reserves, abundant mineral resources, a lot of agricultural land and a tourism friendly landscape can boost the economic development of Mozambique and attract investments.   

(-) Low level of development

Widespread poverty and an extremely low level of development expose Mozambique to a high risk of social unrest. The high number of young people (66% is younger than 25) amplifies this risk. Furthermore, a huge infrastructural deficit and weak institutions constrain economic and business development. 

(-) Economic susceptibility to weather conditions

Weather calamities (that occur often) affect output in agriculture and in the rest of the economy, through disruptions of transportation and electricity supply.

(-) Narrow export base

Despite the fact that some diversification away from aluminium has taken place, Mozambican exports are still mainly accounted for by commodities.

Key developments

1. Budget deficit and public debt soar

A rise of the budget deficit and public debt, increasingly financed from external commercial sources, raises concerns about medium term fiscal sustainability of Mozambique. In 2013 the budget deficit fell from 4.1% in 2012 to 2.9% of GDP, mainly due to an increase in capital gain tax on deals in the gas sector from 1.1% of GDP in 2012 to an estimated 4% of GDP in 2013. But, in 2014, the budget deficit is estimated to reach double digits at about 10% of GDP and push public debt from 41% of GDP in 2013 to 47% of GDP, driven by higher spending on infrastructure and security, while the wage bill continues to weigh heavily on public spending. Investment in infrastructure is in itself welcome, as a huge infrastructure deficit is hindering economic development. However, a lack of transparency and government execution constraints, such as shortage of qualified personnel, raise concerns about the returns on such investments. An illustrative example mentioned in our previous country report is EMATUM, the state fishing company set up in 2013 that issued a maiden, state guaranteed, international Eurobond. No information about the bond was disclosed prior to the issue and it remains unclear what most of the receipts will be used for, which has raised concerns about poor governance and future returns. It also led to some disruptions of donor aid in late 2013, and is probably one of the reasons for lower donor commitments for 2015. That is a matter of concern, because gross donor aid is estimated at 11% of GDP in 2014, out of which 3.1% of GDP consists of direct support to the budget.

On a more positive note, some of the 2014 budget expenses, such as the costs of elections and of EMATUM’s attempts to address governance concerns to some extent, are one-off items. Consequently, the budget deficit is forecast to return to single digits at about 8.4% of GDP in 2015. That is still high though, and will push public debt to 49% of GDP in 2015. Since the nascent gas sector will not bring significant revenues this decade, the pace at which public debt is growing might threaten medium term fiscal sustainability. Especially since, as highlighted in our previous report, the government is increasingly using external commercial financing, which increases debt service costs and vulnerability to market sentiment. Fortunately, close ties with China and a USD 1.3bn, or 8.5% of GDP, sovereign wealth fund provide comfort.

Figure 1: Budget deficit soars
Figure 1: Budget deficit soarsSource: EIU
Figure 2: Economic growth remains brisk
Figure 2: Economic growth remains briskSource: EIU

2. Growth remains strong and reforms bode well for the future

Mozambique continues to maintain robust growth on the back of developments in the coal and gas sectors, and perspectives remain bright. In 2013, economic growth remained high at 7.2%, despite floods that affected output in agriculture, transportation and energy. Developments in the extractive and hydrocarbon sector and investments in infrastructure will support economic growth rates of around 7-8% in 2014 and 2015. Recent progress on reforming legislation for these sectors and the start of new infrastructure projects support this forecast. So does the improvement in political stability (see third key development), as a protracted conflict could have hurt investor sentiment. On the other hand, softening commodity prices pose a downside risk to growth, as they might hinder planned investments, as illustrated by recent disinvestments in the coal sector.

3. Domestic political stability increases

The end of insurgency by the main opposition party Renamo and relatively peaceful elections (whereby the constitutional ban on re-election of the president was respected) mark a significant improvement of domestic stability in Mozambique. After 18 month of low profile insurgency that disturbed main transportation arteries, political party and former rebel movement Renamo signed a peace agreement with its opponent Frelimo on September 5th 2014, thereby eliminating an important security threat in Mozambique. Compromises on the part of Frelimo facilitated this agreement. Significant concessions, such as adjustments of the electoral law to make the electoral process more inclusive, the granting of amnesty and the integration of former Renamo rebels into the armed forces, will strengthen Renamo’s participation to the political system. Therefore, they reduce the chances that the party will resort to violence again. The improvement in stability was further reinforced by relatively peaceful general elections on 15 October 2014. Preliminary results confirm the dominance of Frelimo and its presidential candidate Nyussi, as they gained 58% and 62% of the votes, respectively. They also indicate that Renamo, which received 30% of the votes, has increased its presence in parliament and reassumed its past position as the main opposition party. Therefore, even though Renamo is contesting the results, it is not expected to return to arms because that would jeopardize its recent increase in political clout. 2014 was also the year that Frelimo had to choose a new presidential candidate. The fact that altering the constitution to extend incumbent Guebuza’s presidency was not even on the agenda and that succession took place without major disturbances bodes well for democratic processes and stability in Mozambique. All in all, thanks to the end of the Renamo insurgency and peaceful elections leading to a more balanced political landscape, stability has improved significantly in Mozambique.

Factsheet of Mozambique
Factsheet of MozambiqueSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Mozambique is a South East African country spread along the coast of the Indian Ocean. The country has seen robust economic growth in recent years, on the back of the extractive and energy sectors, also the country’s main exports. But, the agricultural sector still accounts for 78% of employment. The sector is dominated by subsistence farming, despite some diversification towards cash crops in recent years. Trade ties are closest with neighbour South Africa, which is also an important source of foreign investments and of remittances from Mozambican emigrants. Furthermore, China has become an important trade partner and source of financial flows. A large infrastructural deficit has contributed to a geographic economic divide in Mozambique, whereby economic activity is concentrated in the south, while the rest of the country is highly reliant on subsistence farming. The fact that natural resources in the centre and north will soon be exploited is likely to change this pattern.

As indicators in the factsheet reveal, poverty is still widespread. Mozambique is the tenth least developed country in the world according to the Human Development index. Poverty dispersion reflects the north-south divide, though its level is high nationwide. While freedom of expression is fairly respected, weak institutions allow for high corruption, poor governance and high levels of organised crime. Mozambique is regarded an international hub for drug trafficking and money laundry. Besides, the capital Maputo is struggling with an upsurge in kidnappings. Independence from the Portuguese in 1975 was followed by a long civil war. The conflict ended in 1992, when the two main rival parties, Frelimo and Renamo, signed a peace agreement. Weak opposition has enabled the ruling Frelimo to dominate the fairly stable political scene ever since. 

Economic indicators of Mozambique
Economic indicators of MozambiqueSource: EIU


Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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