84287 M OZAMBIQUE E CONOMIC U PDATE January/2014 HIGHLIGHTS:  Mozambique's economy registered strong growth of 8.1 percent p.a. in the third quarter of 2013  The National Assembly approved the 2014 State Budget with a large increase in public spending. The 2014 State Budget also includes a large increase in defense spending as a result of incorporating off-budget public expenditures by EMATUM, a public tuna fishing company  Growth in credit to the private sector has picked pace as the Bank of Mozambique lowers policy rates to a record low of 8.25 percent  While the Metical remained stable against the USD, it has appreciated slightly against the South African Rand while depreciating against the Euro. Growth Mozambique’s The economy grew by 8.1 percent in the third Quarterly Real GDP Growth, y-o-y economy grew by quarter of 2013 (y-o-y). Cumulative GDP over (percent) 10 8.1 percent p.a. in the three quarters grew by 7 percent y-o-y. 8 the third quarter of Growth in the third quarter was driven by 6 2013 the tertiary sector (especially transport and 4 communications), which grew by 8.8 percent. 2 This was followed by the primary sector, 0 which registered growth of 7 percent (driven I II III IV I II III IV I II III by extractive industries). 2011 2012 2013 Source: INE A breakdown of GDP growth by sector reveals that extractive industries continues to be the fastest growing sector (at 21.4 percent) followed by transport and communications (18.4 percent). After weak growth in the past few quarters, electricity and water recovered and grew by 11.5 percent. Financial services continue to be one of the fastest growing sectors in the economy (10.3 percent). Real GDP Growth in 3rd quarter of 2013 by sector (percent y-o-y) 3rd quarter 2012 3rd quarter 2013 Agriculture 8.3 5.8 Fishery 12.4 6.9 Extractive industries 42.5 21.4 Manufacturing industry 1.6 1.6 Electricity and water -7.4 11.5 Construction 4.9 7.8 Trade and services 4.1 7.5 Hotels and Restaurants 2.3 4.2 Transport and communications 10.4 18.4 Financial services 18.0 10.3 Real estate and services to businesses 7.1 0.6 Public administration 11.2 3.6 Other services 2.4 0.2 Total GDP Growth 7.1 8.1 Source: INE 1/6 External sector Preliminary current Current Account Balance (USD million) Merchandise Trade Balance (USD million) account data show a 0 0 deficit significantly -500 -500 lower than -1000 previous quarters in -1000 -1500 2013 -2000 -1500 I II III IV I II III IV I II III I II III IV I II III IV I II III 2011 2012 2013 2011 2012 2013 Source: Bank of Mozambique Source: Bank of Mozambique Preliminary data show that the current account deficit in the third quarter of 2013 has fallen to US$ 490 million, thanks to a lower trade deficit and significantly larger transfers (capital gains taxes). The cumulative trade deficit for the first three quarters has reached US$ 3.1 billion, compared to US$ 2.5 billion during the same period in 2012. This increase is partly explained by continuing imports from large-scale capital intensive projects in the extractive industries and infrastructure sectors. Current transfers increased significantly during the same period from US$ 680 million in 2012 to US$ 1.2 billion in 2013. These developments have helped reduce overall current account deficit over the three quarters from US$ 4.2 billion in 2012 to US$ 3.6 billion in 2013. Cumulative FDI by the third quarter of 2013 reached US$ 4.5 billion, compared to US$ 3.7 billion over the same period in 2012. The large current-account deficit does not represent a structural imbalance since it is primarily driven by large scale capital-intensive investments and is financed by FDI. International Reserves (USD billion) International After a decline during the first half of 2013, reserves increased international reserves are steadily rising. 4 to US$ 3.0 billion by This trend can be attributed to capital gains 3 2 end of 2013 taxes, disbursement of donor funds and FDI. 1 These gains were however partly offset by 0 fuel imports and payments by the state. Nov-12 Jul-13 Nov-13 Sep-12 Sep-13 Jan-13 Mar-13 May-13 Reserves represent 3 months of imports (including mega project imports). Source: Bank of Mozambique Fiscal Sector The execution rate Government revenue in the first three quarters of 2013 reached MZN 88 billion, of the 2013 budget corresponding to a nominal increase of 26 percent over the same period last year and an has improved execution rate of 73 percent. Tax collection was on target by end September 2013 and compared to the according to the Tax Authority, tax collection surpassed the annual target to reach over same period in 2012 MZN 124 billion by end December 2013. Revenue was boosted by capital gains taxes related to gas investments. Total expenditure reached MZN 116 billion by end September 2013 with an execution rate of 60 percent, an improvement of 2 percentage points over last year. Low execution of capital expenditure is explained by delays caused by the floods and persistent problems in the execution of investment projects, particularly when financed from external sources. Financial operations have grown substantially, mainly due to an expansion in active operations with the start of implementation of large infrastructure projects. Deficit financing through external grants and loans has reached 92 percent and 45 percent of the annual allocation respectively. The Government of Mozambique collected US$ 400 million in taxes from capital gains in August 2013. This collection has not been included in the 2013 budget nor is it reported by the Government of Mozambique as collected in the execution reports as would be standard practice, instead being included in the 2014 budget as revenue. Reporting of collection of these taxes in 2013 would improve the revenue and deficit figures in 2013, while revenue projections in 2014 would be lower, which would result in a larger deficit. 2/6 State Budget Execution Rate for Year 2013 Actual Budget Budget Executed Execution Rate (millions MZN) (million MZN) (Jan Sept) % Total Revenue 120,492 88,303 73 Tax Revenue 100,830 75,634 75 Other Revenue 19,662 12,669 64 Grants 23,232 21,443 92 Total Expenditures 193,829 116,528 60 Current Expenditure 100,532 68,016 68 Compensation of employees 50,709 37,004 73 Goods and Services 19,537 13,284 68 Interest on Debt 5,622 2,862 51 Transfer payments 16,046 11,236 70 Subsidies 3,372 1,298 39 Other 5,245 2,332 46 Capital Expenditure 79,992 36,397 46 Domestically financed 34,619 18,736 54 Externally financed 45,373 17,662 39 Financial operations 13,306 12,114 91 Active 9,464 9,341 99 Passive 3,842 2,773 72 Deficit 44,996 20636 46 External financing 41,423 18,783 45 Domestic financing 3,573 1,853 52 Source: Ministério das Finanças The National The proposed budget for 2014 was approved in December. Government revenues are Assembly approves projected at MZN 147 billion and expenditure at MZN 241 billion, a nominal increase of the 2014 State 27 percent. Goods and services, public investments and financial operations, which Budget. capture on lending of the government to SOEs for infrastructure investments, have grown the most. The budget was also increased during the parliamentary approval process by almost MZN 11 billion to incorporate investment expenditure by the Ministry of Defense that had been kept off-budget through the operations of the company EMATUM. This increase is also reflected in an increase in external financing to MZN 57 billion. A total of MZN 135 billion will be allocated to PARP priority sectors. State Budget for Year 2014 Annual Budget 2013 As a % Annual Budget as a %of (millions MZN) of GDP 2014(million MZN) GDP Total Revenue 120,492 26 147,372 28 Tax Revenue 100,830 22 126,558 24 Other Revenue 19,662 4 20,814 4 Grants 23,232 5 30,402 6 Total Expenditures 188,720 40 240,891 45 Current Expenditure 100,471 21 115,666 22 Compensation of employees 50,546 11 56,959 11 Goods and Services 19,479 4 25,018 5 Interest on Debt 5,622 1 6,347 1 Transfer payments 16,046 3 18,078 3 Subsidies 3,372 1 2,671 1 Other 5,406 1 6,593 1 Capital Expenditure 79,983 17 100,770 19 Domestically financed 34,611 7 42,490 8 Externally financed 45,373 10 58,280 11 Financial operations 8,266 2 24,456 5 Active 4,425 1 17,767 3 Passive 3,842 1 6,689 1 Deficit 44,996 5 63,118 6 External financing 41,423 4 57,403 5 Domestic financing 3,573 1 5,715 1 Source: Ministério das Finanças 3/6 The budget The incorporation of off-budgetary public expenditure related to EMATUM operations in the incorporates 2014 state budget was a request by the national assembly. In September 2013 EMATUM, a off-budget government owned company, issued bonds with a government guarantee worth US$850 defense million. The bonds were reportedly to finance investments and operations in the tuna fishing spending by industry, but a large share of the operation will finance coast guard and maritime security the public tuna services that are not commercial in nature. These non-commercial activities, worth US$350 fishing million, have now been incorporated into the 2014 budget. The operation raised concerns with company Mozambique’s development partners regarding fiscal transparency and prioritization of public EMATUM spending. These concerns led a number of development partners to delay budget support disbursements in late 2013. Inflation Inflation slows After a slight acceleration during the first Inflation Rate, y-o-y (percent) further to semester, inflation reached its peak in June 2013 6 5 2.96 percent at 5.2 percent (y-o-y) and has since been 4 p.a at the end declining, reaching 2.96 percent for the year in 3 of 2013. December. This slowdown in inflation is an 2 outcome of various factors like a rise in 1 agricultural production, the continued fall in the 0 prices of food and the effect of the appreciation of Jul-12 Dec-12 Dec-13 Jul-13 Mar-13 Nov-12 Jun-13 Nov-13 Oct-12 Oct-13 Aug-13 Sep-12 Feb-13 Apr-13 Sep-13 Aug-12 May-13 Jan-13 the Metical against the South African Rand. Source: INE (IPC Maputo) Monetary Policy Standing In a move to further increase credit in the Growing Credit to the Private Sector Lending economy, the Bank of Mozambique lowered the 40% Facility Standing Lending Facility (SLF) to 8.25 percent. 30% lowered Credit to the economy seems to have picked up 20% further to during the last year and by October 2013 it was boost credit to growing at almost 30 percent y-o-y. Interest rates 10% the economy charged by commercial banks have not declined at 0% the same pace, suggesting limited transmission Nov-12 Jul-12 Jul-13 Sep-12 Sep-13 Mar-13 Jan-12 Mar-12 May-12 Jan-13 May-13 from policy to market rates. While a significant proportion of bank credit is destined to finance Standing Lending Facility the activities of private enterprises, credit to Growth in credit to private sector households and state-owned enterprises has been Source: Bank of Mozambique gaining weight. Exchange Rate The Metical While the Metical remained stable against the Nominal Exchange Rates 45 4.0 remains US Dollar until the end of December, there has relatively been a slight annual depreciation. This trend in 40 3.5 stable part reflects the effects of the strengthening of 35 3.0 the latter in international markets. There was 30 2.5 an annual appreciation of the Metical against 25 the South Africa Rand while on the other hand 20 2.0 the Metical has depreciated against the Euro since July. USD Euro ZAR Source: Bank of Mozambique 4/6 The real The stability of the nominal exchange rate is Real Effective Exchange Rate (Jan 2010 = 100) effective also reflected in the real effective exchange rate, 180 exchange rate which has been fairly stable for the past 18 160 140 has been months and it was at the end of 2013 slightly 120 stable since lower than at the end of 2011. This stability 100 80 mid 2011 follows a period of relative appreciation in late 60 2010 and early 2011. Strong FDI inflows and a 40 projected increase in exports in the medium 20 0 term may put upward pressure on the real Oct-10 Oct-11 Oct-12 Oct-13 Jan-10 Jan-11 Jan-12 Jan-13 Apr-10 Apr-11 Apr-12 Apr-13 Jul-10 Jul-11 Jul-12 Jul-13 effective exchange rate Source: World Bank Staff Estimates Economic News IMF completes The International Monetary Fund (IMF) completed the first review under the three-year first review Policy Support Instrument (PSI) for Mozambique. The PSI-supported program is on track. The under the new review highlights the strong macro-economic performance with moderate inflation. Outlook Policy Support for the medium term remains favorable and growth is expected to be sustained by the natural Instrument for resource boom and investment investments. Progress has also been positive but with some Mozambique slippage in structural reforms. The review raised concerns about lack of transparency and prioritization of projects related to the issuance of bonds with a public guarantee by EMATUM. Companies The contract to construct a 525 kilometer railway line between Moatize in Tete and Macuse in from Thailand Zambezia, and develop the port terminal at Macuse has been awarded to a consortium of & Mozambique companies in Thailand (Italthai Engineering) and Mozambique (consortium Codiza and SOE will build CFM). The estimated cost of the projects stand at US$ 3.5 billion. The railway would help to railway line transport mineral coal extracted in Moatize. The railway line at Sena is also being expanded, and port which should expand capacity to transport coal from Tete from the current 6.5 million to 20 million tones. Completion is expected by the end of 2015. Capital gains American oil and gas company Anadarko is selling 10 percent of its holding in the Rovuma taxes could Basin to the Indian state-owned Oil and Natural Gas Corporation (ONGC) Videsh Ltd. for continue in US$ 2.64 billion, which could result in further capital gains taxes for the Government in 2014. 2014 Other operations seem to be under preparation to further consolidate ownership structures in the Rovuma basin, which could generate further capital gains taxes. Government of The Government of Mozambique, through the Ministry of Mineral Resources (MIREM), has Mozambique published details of several concession contracts for exploration in the petroleum and mining publishes sectors. This is part of the commitment of the Government to increase transparency in the mining and natural resources sector. The Government has released contracts in the petroleum (with petroleum Anadarko Petroleum Corporation, Petronas and Eni in the Rovuma basin, with Sofala Offshore contracts Limited for the Sofala Block and with Sasol for the Pande and Temane fields and Block A on land in the south) and mining sectors (with Kenmare Resources for the exploitation of heavy sands in Moma). Other contracts may be made public in the future. Japan to The Japanese government is to grant Mozambique a loan of US$ 167 million to build a gas finance new fired power station in Maputo. The station will generate 100 megawatts, about a third of Maputo Power Maputo's current electricity consumption. Work on the new station should be complete by Station 2018. Available projections show that the demand for electricity in southern Mozambique will continue to grow at an annual average rate of 18 per cent for the next five years. Mozambique's public electricity company, EDM, expects considerable improvement in electricity supply resulting from the new power station. 5/6 Violent clashes Since mid-2013 there has been renewed conflict between armed members of the opposition between armed group RENAMO and security forces from the Government of Mozambique which has resulted members of in violent clashes. Violent clashes were initially limited to a small geographical area in Sofala. . RENAMO and According to some media reports there have now been clashes in the provinces of Nampula the and Inhambane and armed members of RENAMO have more recently been seen in Tete. While Government it is difficult to assess the impact that these clashes may have on the country’s economy, a security forces number of analysts, including from the country’s largest private sector association, CTA, have continue warned that a prolonged low-level conflict or an escalation of the conflict could negatively affect the country’s prospects and foreign investments in Mozambique’s extractive industries. Mozambique In October 2014, Mozambique will conduct its 5th general elections (since the end of the civil will conduct war in 1992) , which will elect the country’s next president. The constitutional 2 -terms limit general for the country’s president means that President Guebuza will not run again for the election. elections end The Political Commission of Frelimo party (the party that has governed Mozambique since of 2014 independence), has proposed three (shortlisted) candidates to Frelimo’s Central Committee. The Central Committee, which is to meet at the end of February, will choose Frelimo’s candidate to run for president in the general elections. The three (shortlisted) candidates proposed by the Political Commission are Alberto Vaquina, the current Prime Minister, Jose Pacheco, Minister of Agriculture, and Filipe Nyussi, Minister of Defense. Economic Prospects Global growth Commodity price forecast (2005=100) Growth prospects of Mozambique’s main trading is expected to partners accelerate in 140 10 2014. Prices 8 for key 120 6 commodities for 4 Mozambique 100 2 will remain similar to 80 0 2013, but well 2012 2013e 2014f 2015f 2016f -2 2012 2013e 2014f 2015f 2016f below prices in Energy Metals and minerals China Euro Area India recent years. Agriculture Fertilizers Malawi South Africa Zimbabwe Source: World Bank GEP Source: World Bank GEP The January 2014 Global Economic Prospects report expects acceleration in global growth from 2.4 percent in 2013 to 3.2 percent in 2014 thanks to the rebound in high-income economies. Economic growth in Mozambique is projected by this report at 8.5 percent in 2014 up from 7 percent in 2013, driven by investments in the natural resources sector as well as increased production from these projects. The GEP projects price stability for commodities that are key for Mozambique (energy, minerals and metals), with prices well below prices in 2012, a result of dampened demand from China coupled with robust supply of metals in the international market. With rising supply from the US, there is a risk of downward pressure on energy prices (in particular gas). The Mozambican government's Economic and Social Plan for 2014 has set a target for economic growth of eight percent with a rise in nominal GDP from an expected US$ 15.4 billion in 2013 to slightly more than US$ 17 billion this year, and that of GDP per capita from US$ 631 to US$ 680 (based on the population projections from the 2007 census). The Plan also projects an average inflation rate of no more than 5.6 percent. Exports for the year are projected at US$ 4.8 billion up from US$ 3.7 billion in 2013. 6/6