81718 M OZAMBIQUE E CONOMIC U PDATE October/2013 HIGHLIGHTS:  Mozambique's economy grew by 8.7 percent p.a. in the second quarter of 2013, after a weak first quarter  National Assembly approves mid-year revision to the 2013 State Budget  Growth in credit to the private sector is gaining pace as the Bank of Mozambique lowers main interest rate further to 8.75 percent citing both benign inflation and a weakening external environment  The Metical continues relatively stable against the USD and Euro, but it has appreciated over the past few quarters against the South African Rand Growth Mozambique’s GDP growth reached 8.7 percent per annum Real GDP Growth Rate (y-o-y) economy grew by in the second quarter of 2013. This compares 10 8.7 8.7*percent p.a. in to a 4.3 annual growth in the first quarter. 8 the second quarter The economy has recovered from the 6 4.3 of 2013 negative effects of the extensive flooding of 4 2 the Limpopo Valley in January. Agriculture 0 registered a positive growth rate of 9.5 I II III IV I II III IV I II percent associated with the production of food in areas that were not severely affected 2011 2012 2013 by floods. Source: INE Extractive Industries, which is the fastest growing sector (33 percent p.a.), contributed 1.7 percentage points to growth in GDP. Other major contributors to growth were the agricultural (2.8 percentage points) and transport (1.7 percentage points) sectors. The electricity and water sector as well as the hotels and restaurants’ sector however contracted respectively at a rate of 5.4 and 4.4 percent p.a. Real GDP Growth in 2013 by sector (percent p.a.) 2nd quarter 2012 2nd quarter 2013 Agriculture 6.2 9.5 Fishery 7.5 6.8 Extractive industries 54.7 33.0 Manufacturing industry 8.3 0.6 Electricity and water 10.4 -5.4 Construction 11.7 8.6 Trade and services 8.3 6.6 Hotels and Restaurants 4.7 -4.4 Transport and communications 9.5 15.5 Financial services 3.0 19.8 Real estate and services to businesses 7.1 1.7 Public administration 10.1 3.7 Education 13.2 5.2 Health and social protection 7.9 6.6 Other services 2.7 0.5 Total GDP Growth 8.0 8.7 Source: INE 1/6 External sector Record current Current Account Balance Merchandise Trade Balance account deficit by (USD million) (USD million) end of 2012 0 0 -500 -500 -1000 -1500 -1000 -2000 -1500 I II III IV I II III IV I II I II III IV I II III IV I II 2011 2012 2013 2011 2012 2013 Source: Bank of Mozambique Source: Bank of Mozambique In 2012, the current account deficit grew by 73.4 percent to reach USD 5.2 billion. In the first half of 2013 it reached USD 3.1 billion, compared to USD 2.7 billion during the same period of 2012, in line with the expanding current account deficits, partly the result of a growing trade deficit, caused by imports from the large investment projects in extractive industries and infrastructure. Since most of the projects are still in the construction phase and are relatively import intensive, the large trade and current account deficits are likely to continue in the next few years. Large FDI inflows have continued in 2013, amounting to over USD 3.5 billion in the first half of the year and to a large extent providing the needed external financing for the current account deficit. The current account deficit is projected to reach 40 percent of GDP by end-year. International International reserves have been slowly International Reserves (USD billion) reserves amounted increasing after a slight decline early in 3 to USD 2.8 billion the year, and now amount to USD by end of August 2.8 billion. Increasing international 2 reserves in August 2013 were the result of payments of capital gains taxes by 1 companies active in the Rovuma basin gas exploration. International reserves 0 are projected to stay at slightly below Jul 12 Sep 12 Jul 13 Nov 12 Mar 13 may 12 Jan 13 may 13 USD 3 billion by year-end, worth almost 3 months of imports (4 months if imports from mega projects are excluded). Source: Bank of Mozambique Fiscal Sector National Assembly The National Assembly approved a mid-year revision to the 2013 State Budget in August approves mid-year 2013. State revenues increased by 6 percent to MZN 120,492 million compared to the revision to the 2013 original budget. This is largely due to unexpected capital gains from the extractive State Budget industries sector. Slightly better than expected revenue collection has also been reported by the Tax Authority and internally generated revenue from state institutions. External financing has increased due to additional credit from both concessional and non- concessional sources. Overall, planned expenditures for 2013 have increased by 8 percent to MZN 188,720 million. This is largely reflected in a 17 percent increase in investment expenditures, which is both domestically and externally financed. The bulk of increased investment spending has been allocated to post-flood reconstruction. In terms of current expenditure there has been a rise in the wage bill, which is most likely due to increased 2/6 salaries and recruitment of public sector workers, particularly in the health sector. To a large extent the one-off capital gains tax are being used to finance current expenditures, including the increase in salaries, which raises concerns over fiscal sustainability. The size of the deficit (before grants) as a proportion of GDP has increased from 8.5% to 9.6%. Mid-Year 2013 State Budget Revision (millions MZN) Original budget 2013 Mid-Year Budget Revision 2013 Total Revenue 133,773 143,724 Tax Revenue 95,492 100,830 Other Revenue 18,470 19,662 Grants 19,811 23,232 Total Expenditures 174,955 188,720 Current Expenditure 98,164 100,471 Compensation of employees 48,809 50,546 Goods and Services 18,457 19,479 Interest on Debt 5,622 5,622 Transfer payments 15,504 16,046 Subsidies 4,672 3,372 Other 5,099 5,406 Capital Expenditure 68,525 79,983 Domestically financed 29,880 34,611 Externally financed 38,645 45,373 Financial operations 8,266 8,266 Active 4,425 4,425 Passive 3,842 3,842 Deficit 41,182 44,996 External financing 37,609 41,423 Domestic financing 3,573 3,573 Source: Direcção Nacional do Orçamento, Ministério das Finanças The execution rate of current expenditures is at 45 percent and the execution rate of capital expenditures is 26 percent in the first two quarters of 2013. This shows minimal change compared with the same period of last year. The relatively low execution of capital expenditures is due to slow implementation of several projects. In total, the Government allocated MZN 107,792 million to priority areas in 2013, which represents nearly two thirds of the budget. Of this total allocation, the budget execution rate for priority areas has been recorded MZN 39,183 million, which is 36 percent of the original allocation. The proposed budget for 2014 was submitted to the National Assembly in September 2013. State revenues are expected to increase to MZN 147,372 million. This is largely due to an increase in fiscal revenues, particularly from corporate income taxes and capital gains. Overall, external financing is expected to increase from MZN 64,654 million to MZN 76,885 million. Total expenditures including financial operations are expected to increase to MZN 229,722 million, due to planned increases in compensation of employees, spending on goods and services and internally financed investments. The increase in current expenditures again raises concerns over fiscal sustainability, with total spending projected over 40 percent of GDP. Whilst the overall deficit (before grants) is expected to increase from MZN 44,995 million to MZN 51,947.90 million, there is minimal change in the deficit as a proportion of GDP due to an expected upward revision of GDP. 3/6 Inflation 12-Month Inflation (percent) Inflation slows The annual inflation rate fell to 4.5 percent 6 down to 4.5 percent in August 2013 after a 3-month 5.2 p.a. in August deceleration. Inflation accelerated in the 5 4.9 4.5 first half of the year as a result of the 4 floods, but seems to have reached a peak in 3 June. Further considerations, such as recovery of food production in the 2 Chókwè-area after the floods and the 1 relatively weak South African Rand, suggest that inflation will remain benign 0 jun 2012 jun 2013 aug 2012 aug 2013 oct 2012 dec 2012 feb 2013 apr 2013 during the year, despite growth in government spending and the credit to the private sector as well as the monetary policy easing. Source: INE (IPC Maputo) Monetary Policy Standing Lending The Bank of Mozambique lowered its key SLF rate and credit growth Facility lowered to policy interest rate, the Standing Lending 8.75*percent; credit Facility (SLF), to an all-time low of 30% growth accelerating 8.75 percent in August 2013 while 20% maintaining reserve requirements at 8 percent. The decision to lower interest 10% rates was based on low inflation and 0% inflation expectations as well as a weak Oct-12 Jun-12 Dec-12 Jun-13 Feb-12 Feb-13 Apr-12 Aug-12 Apr-13 external environment. During the 12- months ending in August, credit to the economy has grown by 32 percent, Standing Lending Facility reaching MZN 137 billion, this compares to Growth in credit to private sector 13 annual growth in December of 2012. Source: Bank of Mozambique The Metical The Metical has remained relatively stable against major trading partner currencies with continues relatively the exception of the South African Rand, against which it has appreciated over the past few stable against the quarters. This relative stability is in line with the performance of the currency over the past USD and Euro, but it two years, which has seen a slight and very gradual depreciation against the Euro and the has appreciated USD. The real effective exchange rate (which compares the Metical to the Euro, US Dollar over the past few and SA Rand taking into account local inflation and weights in trade) does not reveal any quarters against the significant movement of the currency over the past few years. South African Rand Nominal Exchange Rates, Jan 1, 2012 to August 30, 2013 45 4 40 35 3 30 25 20 2 Jul-12 Jul-13 Jun-12 Jun-13 Jan-12 Apr-12 May-12 Nov-12 Jan-13 Apr-13 May-13 Mar-12 Aug-12 Dec-12 Feb-13 Mar-13 Aug-13 Feb-12 Sep-12 Oct-12 MZM/USD MZM/EUR MZM/ZAR (RHS) Source: Bank of Mozambique 4/6 Economic News Government of A recently created company with majority ownership from the Government of Mozambique Mozambique (Ematum) issued a USD 500 million bond to buy a tuna fleet. The declared main purpose of the provides a company is tuna fishing. The proceeds of the bond will go towards financing the purchase of government about 30 fishing boats and patrol vessels (valued between EUR 200 and 300 million, according guarantee for a to the French press), fishing infrastructure, an operations centre and related training. The $500 million government-guaranteed seven-year bond was the country's first international bond issue. It bond issued by was issued privately (i.e. non competitively) at a comparatively high yield of 8.5 percent. The a partly state- issuance of the bond has raised concerns about transparency, lack of adequate procurement, owned fishing eroding public investment management procedures and the impact it may have on debt company sustainability in Mozambique. Italian Group ENI has paid USD 400 million in capital gains taxes resulting from the sale by the Italian group ENI Pays Capital of a 20 percent stake in the Area 4 block to the China National Petroleum Corporation (CNPC) Gains Tax to for USD 4.2 billion. Taxation of capital gains on mining and gas transaction is quite new in Mozambique Mozambique and the first significant transaction took place with the taxation of the London- registered company Cove Energy in 2012 at a rate of 12.8 percent. In 2011 no capital gains tax was paid when Rio Tinto bought coal explorer Riversdale for USD 4 billion, leading to criticism from civil society organizations. The reception of USD 600 million in capital gains taxes so far this year has started a debate in society on how to best manage natural resource revenues. Forthcoming A new natural gas-fired power plant, a partnership between Mozambican state electricity Natural Gas- company Electricidade de Moçambique (EdM) and South African group Sasol, is due to start fired Power operating in 2014 in Ressano Garcia, district of Moamba, Maputo Province. EdM has a 51 Plant in percent stake in the partnership, while the remaining 49 percent is owned by Sasol New Ressano Garcia Energy, of the Sasol group. The new Ressano Garcia Thermal Plant, which requires estimated investment of USD 250 million, will be the biggest natural gas-fired plant in Mozambique and the second of its kind in the region after a power plant operated by Scottish company Aggreko started operating earlier this year. Mozambique consumes an annual average of 650 megawatts of power and demand is growing by 20 percent a year. The new power plant, which will have a production capacity of 175 megawatts, will meet some of that new demand. Mozambique In June 2013 the IMF board approved a Debt Sustainability Analysis report for Mozambique moves from low which changes Mozambique’s debt sustainability rating from low to moderate. The main to moderate reasons behind this deterioration of the risk rating include (i) a lower discount rate, (ii) a risk of debt significant increase in debt contracted in the last two years related to an ambitious public distress investment program aimed at narrowing the infrastructure gap, and facilitating the development of natural resources, and (iii) large movements in the underlying balance of payments with the onset of coal exports and significant commercial investments in natural gas exploration and liquefaction. 5/6 Economic Prospects Recent Commodity price forecast (2005=100) Growth prospects of Mozambique’s main developments trading partners show a slight 300.0 10 weakening of CHN economic 240.0 8 EUR prospects, both 6 180.0 for global IND growth and 120.0 4 MLW commodity 2010 2011 2012e 2013f 2014f 2015f 2 prices ZAR Energy Agriculture 0 2011 2012 2013f 2014f 2015f ZBW Fertilizers Metals -2 Source: World Bank GEP Source: World Bank GEP In the most recent Global Economic Prospects (GEP) report, the World Bank has slightly lowered projections for key commodities for Mozambique (energy, metals). Lower commodity prices would lower inflation expectations, but it could also affect investments and exports for extractive industries in Mozambique. The latest GEP report forecasts a slow but steady acceleration of growth in the world economy, but it also lowers global growth projections for 2013 to 2.2 percent (from 2.4 percent in January). This is reflected in growth prospects for Mozambique’s main trading partners. While growth is projected to accelerate from 2013 onwards, growth projections are now lower than they were half a year ago, suggesting a weakening of the external environment. 6/6