80179 M OZAMBIQUE E CONOMIC U PDATE April/2013 HIGHLIGHTS:  Mozambique's economy grew at 8.2°percent p.a. in the final quarter of 2012. Overall, at 7.4 percent, growth in 2012 matched the government target.  Year-on-year inflation rose to 4.3 percent in March, compared to 2.2 percent at end-2012.  The 2012 budgetary balance shows low realization of external resources and growing revenues from mega projects in energy and mining.  Damages and losses of the January 2013 Limpopo floods are estimated in excess of USD 250 million, nearly half of this is attributable to the road network and another 30 percent in the agricultural sector. Growth Mozambique’s Real GDP grew 8.2 percent in the fourth quarter of 2012 compared to the growth continues same period last year yielding a yearly growth rate of 7.4 percent in 2012, robust. almost matching the government target of 7.5 percent. Extractive industries Real GDP Growth Rate (y-o-y) grew at 41 percent p.a. in the last 10 quarter and contributed with 8 0.6 percent points to GDP growth. 6 Construction slowed in the fourth 4 quarter, but still rose by 10 percent 2 above last year’s level. Transport and 0 communications as well as financial I II III IV I II III IV services had strong growth rates; possibly spill-overs from the growing 2011 2012 extractive industries. Real GDP Growth in 2012 by sector (percent) 2012 4th quarter Agriculture 7.1 6.8 Extractive industries 40.7 35.2 Manufacturing industry 7.9 9.3 Trade and services 8.2 8.0 Electricity and water -0.4 -8.3 Construction 9.8 16.4 Transport and communications 10.4 12.7 Financial services 12.8 28.6 Public administration 8.9 11.7 Education 3.5 2.1 Health and social protection 6.6 6.6 Total GDP 7.4 8.3 Source: INE 1/6 External sector Trade deficit External Commerce (USD billion) The external sector grew sharply in approaches 2.0 2012 as merchandise exports and USD 1 billion. 1.5 imports rose by 32 and 15 percent, 1.0 0.5 respectively. The composition of 0.0 imports puts the widening trade I II III IV I II III IV deficit into perspective, since it seems 2011 2012 to be primarily the result (and financed) by large FDI inflows over Imports Exports the past few years. In the fourth Source: Bank of Mozambique quarter, imports amounted to USD 1.9*billion; a growth of 75 percent compared to the fourth quarter of 2011. Exports grew a modest 5 percent in the same period to a level of about 900*million. This development has caused a widening of the trade deficit to almost USD 1 billion. Coal exports reached USD 435 million in 2012, well above USD 21*million a year earlier. Aluminium is still the largest export at USD 1.1 billion. Electricity exports decreased 22 percent to USD 234 million due to problems at the Cahora Bassa dam in the month of July. International Gross international reserves have International Reserves (USD billion) reserves amounted declined in the first quarter of 3 to USD 2.3 billion in mid-March. 2013. By end-March, the reserves 2 stood at USD*2.3 billion, compared to USD 2.7 billion at end-2012. The 1 reduction has been mainly driven 0 by sales of foreign currency by the mar 12 jul 12 jan 13 mar 13 sep 12 may 12 nov 12 Bank of Mozambique, and international reserves now amount to four months’ worth of imports. Source: Bank of Mozambique Fiscal Sector State budget According to the Ministry of Finance, the deficit on the state budget for progress report for 2012 was expected to be around 2.7 billion meticais (0.7 percent of GDP), 2012 reveals low realization of but the year ended with a surplus of close to 2 billion (0.5 percent of GDP). external funds, Both revenue and expenditure were lower than expected with realization growing revenues rates of 85.8 and 83.3*percent respectively (33.8 and 33.3 percent of GDP). from mega projects. While internal resources were all realized, only 59.2 percent of external resources (9.2 percent of GDP) reached their budgeted value. Current expenditures amounted to 19.9*percent of GDP as compared to the budgeted 20.6 percent. Ten percent of GDP was used for compensation of employees, in line with the budget. In terms of development expenditure, or investments, only 75.4 percent of the budget was realized. In conjunction with the low realization of external resources (grants and credits), this could be indicating a lower than expected capacity to spend. Mega projects contributed to the state budget with MZN 5.6*billion (1.4 percent of GDP) which can be attributed to capital gain- and corporate 2/6 taxes. Mega projects contributed 5.7 percent of total revenues; an increase of 2.3 percentage points compared to the realized budget of 2011. Budget realization 2012 (Million MZN) 2012 Budget 2012 Realization Value % Weight Value % Realized Internal Resources 98,688 60.5 101,765 103.1 State revenue 95,538 58.6 98,615 103.2 Internal loans 3,150 1.9 3,150 100.0 External Resources 64,347 39.5 38,073 59.2 Grants 34,719 21.3 25,290 72.8 Loans 29,628 18.2 12,782 43.1 Total Resources 163,035 100 139,838 85.8 Current Exp. 85,366 51.5 82,395 96.5 Development Exp. 66,982 40.4 50,479 75.4 Financial Operations 13,453 8.1 4,979 38.1 Total Expenditure 165,800 100 137,853 83.3 Balance -2,765 1,985 Source: Ministry of Finance Inflation Inflation jumped to The inflation rate rose to 4.3 12-Month Inflation (percent) 4.3 percent in percent in March compared to 5 February and March same month a year earlier. The 4 acceleration in inflation in the 3 first quarter of the year is mostly a result of relatively low inflation 2 in the first months of 2012. Back 1 then the Metical appreciated 0 towards the South African Rand maj 2012 jul 2012 nov 2012 sep 2012 mar 2012 mar 2013 jan 2013 with the expected drop in prices on imported goods. Source: INE (IPC Maputo) Domestic prices of At the national level, prices on maize Food prices (December 2010=100) agricultural and wheat, collected by the Ministry 120 commodities lie below the CPI in the of Agriculture were relatively stable 110 first two months of in the first months of 2013 in spite of 100 2013. the floods in the Limpopo Valley. 90 Maize follows its seasonal pattern, 80 whereas wheat prices remain stable. mar-12 jul-12 sep-12 nov-12 jan-12 jan-13 maj-12 Compared to February 2012, Maize is about ten percent cheaper this Maize Wheat CPI year, whereas wheat costs the same. Source: SIMA 3/6 Monetary Policy Standing Lending The Bank of Mozambique has SLF rate and credit growth Facility maintained maintained its key policy interest 20% at 9.5 percent 15% rate, the Standing Lending Facility 10% (SLF) at the all-time low 9.5 percent 5% in the first three months of 2013 0% Aug/12 Dec/11 Jun/12 Dec/12 Oct/11 Feb/12 Oct/12 Apr/12 despite slightly higher inflation figures registered in February and March. Standing Lending Facility Growth in credit to private sector Source: Bank of Mozambique Appreciation of the After a period of slight depreciation, the Metical has stabilized against the Metical against the Euro and the USD in the first 3 months of 2013 and appreciated somewhat Rand. against the ZAR. As of the end of March the exchange rate against the US dollar and euro reached 30.2 and 38.9 MZN respectively, while the ZAR is at a relatively low level of 3.26*MZN. The latter development has a dampening effect on inflation in Mozambique through prices on goods imported from South Africa. Nominal Exchange rates, April 1, 2012 to March 31, 2013 45 3.8 40 3.6 35 3.4 30 3.2 25 3 Nov Jan Sep Dec Feb Apr Aug May Oct Mar Jul Jun MZN/USD MZN/EUR MZN/ZAR (right axis) Source: Bank of Mozambique Economic News Floods cause In January, heavy rainfall led the Limpopo River to rise around 6 meters widespread above flood alert levels generating a sudden and extreme flood event on the damages in the Limpopo Valley. Lower Limpopo flood plains. The floods have been the worst disaster to hit Mozambique since the 2000 flood. 113 were dead and 186,000 people evacuated in Gaza province to temporary camps, where sanitary conditions are precarious raising concerns about rapidly growing incidence of malaria and diarrhoea. Preliminary estimates indicate damages to affected settlements and infrastructure in the order of USD 135 million and loss of USD 112 million in crops. Despite the damage, the 2013 floods showed the benefits of strengthened early warning systems. During the 2000 floods, some 700 people lost their lives. The much lower mortality in 2013 was largely attributable to much improved early warning systems linked to disaster preparedness contingency planning. 4/6 Large economic The flood destroyed almost all crops along 89,000 ha of cultivated land, losses in agriculture and due to transport affecting rice, maize and vegetable crops. A rapid assessment of irrigation disruptions infrastructure revealed significant damage, likely to affect future harvests also. Damages were recorded on around 18 stretches of paved road and bridges, including three on the main national road (N1). Many communities became inaccessible, while others could be reached by boat only. Damage to roads and bridges is conservatively estimated at USD 80 million. Railway services connecting Tete to Beira were also affected by the floods, creating significant disruptions to coal exports. However, with the reopening of the line end of March, Vale remains optimistic about reaching its 2013 export target of 4.5 mt. New minimum The council of ministers approved a new set of minimum wages on the 16th wages approved of April 2013. The new values include an increase in the minimum wage of 8.7 percent in agriculture to 2,500 meticais per month and a 10 percent increase to 3,943*meticais in the manufacturing sector. The change in minimum wage for public administration employees is not yet announced. Mozambique earns Mozambique has started to levy capital gain taxes on the sale of local assets capital gain taxes on by foreign companies, resulting in significant revenues from capital gain sales of natural gas participations. taxes in 2012 and in all likelihood also in 2013, as partnerships in the Rovuma basin to exploit the country’s gas deposits continue to consolidate. Revision of A newly revised draft petroleum law has been recently approved by the petroleum law Council of Ministers. The draft law, sent to the National Assembly for approved by cabinet discussion and approval, concentrates on clarifying investor rules and ensuring that some of the revenue from the extraction of mining and petroleum be allocated to local communities. The share is determined by the yearly budget, and it was set at 2.75 percent of all royalties for the 2013 state budget. Another element of the law is that explorers must now report new discoveries to the government within 24 hours. Economic Prospects Growth in 2013 The floods in early 2013 will certainly affect growth prospects this year. An likely lower than official government revision of its growth projection for 2013 is not initially projected due to floods available yet, but growth may be lower by about 2 percentage points compared to the government’s initial projection of 8.4 percent. This adjustment is mainly caused by lower than expected agricultural output, but also disruptions in transport and more generally economic activities caused by the floods. When Mozambique was last hit by a major flood event in 2000, GDP growth declined by 7 percentage points, from 8.1 in 1999 to 1.1 in 2000. The negative impact on GDP is likely to be lower this year for a variety of reasons, including a comparatively more developed agricultural sector and a different economic structure. Other potential economic impacts from the floods include lower tax revenues, higher expenditures (for reconstruction etc.), and higher inflation. 5/6 Growth in main Growth Mozambique's main export According to the April 2013 World export markets markets Economic Outlook, growth in 10 China Mozambique’s main trading 8 India partners is expected to speed up in 6 Malawi 2013 compared to 2012. China, 4 India, Malawi and Zimbabwe have 2 South Africa the highest forecasted growth rates, 0 Zimbabwe while for the Euro area, -2 Euro area expectations have been adjusted downward since the last Economic Outlook at 0.3 percent negative Source: WEO April 2013 growth in 2013. If the Euro area crisis is prolonged, it could result in lower donor grants to Mozambique in the future. Development in Global commodity prices are Commodity price forecast (2005=100) commodity prices expected to continue their slow 300 downward trajectory through 2013-2015 according to the 240 latest Global Economic 180 Prospects. Compared to the last forecast, prices on all 120 commodities except fertilizers 2010 2011 2012 2013f 2014f 2015f have been lowered, but still lie Energy Agriculture above their 2010 level. The Fertilizers Metals gradual decline in energy and metal prices affect Source: GEP January 2013 Mozambique’s exports negatively. 6/6