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Dec 17 2013

Mozambique political tensions seen rising in 2014

Mozambique political tensions seen rising in 2014 Photo Credit:REUTERS/Fadi Al-Assaad
A subliminal moment in Mozambique's history in 1997 turned the country's economy on its head.

During that time, a vast portion of the country's income was being transferred to repay the country's debt, and even as one tranche was paid off, another loomed round the corner.

"When we came to the fifth rescheduling, in 1997, we realized that the debt was unsustainable - that is, that the reconstruction development plan could not be implemented with that debt, because about 75% of the resources should have gone towards debt servicing," said Luisa Diogo, who was the country's minister of financing and planning and then its prime minister between 2004-10.

"There was one debt that we were paying and another that was pending. So we decided to seek debt forgiveness," Diogo, who now chairs Barclays Bank Mozambique SA, told an audience at Chatham House in November.

"When we have a clear program and convictions and are defending a just cause, the partners end up by giving way. We wanted larger debt forgiveness than they were offering. We wanted the money to be used for education, health, water supply and roads. We had already shown, in HIPC-1 [heavily indebted poor countries], that our country was serious, with a serious and far-sighted leadership. We had the evidence in hand that we were serious, and our macro-economic indicators showed that."

Indeed, Mozambique's macroeconomic indicators are impressive. The country's growth rate has exceeded 5-7% over the past decade, and growth has exceeded 7% in each of the past two years alone, with another strong set of growth figures expected in 2013. The World Bank expects growth to average 8% per annum over the medium-term, thanks to a range of mega-projects under way.

The country's GDP grew 8.7% in the second quarter of 2013, following a weak 4.3% growth in the first quarter, due to extensive flooding of the Limpopo Valley in January.

Extractive industry, which is the fastest growing sector (33%), contributed 1.7 percentage points to GDP growth, according to the World Bank.

However, the government has lowered its real GDP growth rate projection of 8% in its Economic and Social Plan for 2013, to 7% in its latest Economic Climate and Outlook for Inflation publication.

The medium-term Action Plan for Reducing Poverty (PARP) for 2011-14 aims to reduce the poverty headcount ratio from 54.7% in 2009 to 42% in 2014 and to address infrastructure shortfalls.



HYDROCARBON-LED GROWTH


Hydrocarbons are driving the country's impressive growth. Mozambique is set to see its first commercial crude shipment in 2014, and begin LNG exports by 2018, according to the oil companies operating in the country.

"Mozambique is likely to remain one of the most dynamic economies in Sub-Saharan Africa, in part thanks to the expected natural resource boom," said the International Monetary Fund.

Analysts believe the country has the potential to join the ranks of resource-rich countries, and emerge as a natural gas champions.

"A new generation of coal and natural gas projects is underway, which will likely support impressive growth rates in the years to come," said Victor Lopes, an analyst at Standard Chartered Bank.

Foreign direct investment, mainly the resources sector, has exceeded USD 1 billion in each of the past few years and will continue to inch higher as new projects come on line.

The Cahora Bassa dam is one of the largest hydropower installations in Africa, generating 2,075 megawatts (or 85% of the country's current energy production capacity), with much of this power exported regionally, the World Bank notes. The country's potential hydropower generation is estimated at 13,000 megawatts, with the capacity to produce 65,000 Gigawatt-hours per year of energy.

"This untapped resource has attracted significant foreign private sector interest in investing in several power mega-projects that could make Mozambique one of the largest power producers in the African continent," the bank said.

Mozambique's recently discovered natural gas resources in the Rovuma basin exceed 30 trillion cubic feet (comparable to Oman). Companies like South Africa's Sasol Petroleum, US-based Andarko Petroleum and Italian giant Eni have been joined by Chinese players to turn Mozambique into a natural gas powerhouse exporting to Asian countries.

Mozambique is already a major producer of aluminum, but its coal reserves could also transform the country into one of the world's largest coal exporters in the world.

The World Bank estimates that with more than 1,000 active prospecting and exploration licenses in mining and oil and gas, the country could generate as much as 10% of its GDP from resources sector, compared to current contribution of 5%.

POLITICAL CHALLENGES

But the country's economic miracle is threatened by a political standoff with the Renamo opposition guerrillas. Political violence has increased in the country, including kidnappings in capital Maputo and other cities.

"While a return to civil war is unlikely given Renamo's weak support and its limited human and financial resources, there is now localized conflict in the central part of the country. Tensions are high," said Standard Chartered Bank in a report. "Mozambican army troops are deployed in the Sofola region and have had sporadic confrontations with Renamo. Its leader, Afonso Dhlakama, has gone into hiding."

A general election in 2014 will keep the political temperature and uncertainty high.

"This uncertainty may deter some foreign investment; disruptions to exports cannot be ruled out if the violence escalates," said Standard Chartered.

Investors are also befuddled by the lack of transparency of the USD 850 million bond by a new company, which is buying tuna fishing boats and coastal patrol vessels and is guaranteed by the Mozambique government.

"[The IMF team has] advised that possible non-commercial activities associated with a recently established public sector company for tuna fishing (EMATUM), which issued an USD 850 million Eurobond in September, be included in the 2014 budget and transparently reflected in the fiscal accounts," said the IMF in its October 30 report on the country.

Next year will be crucial for the government as it handles the escalating political tension in an election and ensure that foreign investors remain attracted to Mozambique's resources.

"Political noise will remain high in 2014," said Standard Chartered. "The ruling Frelimo party is likely to win the elections given its dominance of the political scene. However, there is uncertainty over who will be the next president, as Frelimo's leader, president [Armando] Guebuza, is currently serving his second and last term. There has also been negative press coverage linked to rising crime and security issues in the capital, Maputo. This could affect some sectors, such as tourism, although the impact on growth should be limited."

© alifarabia.com 2013

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