Mozambique mapped out

Although Mozambique faces few immediate domestic or external political threats—its borders are reasonably safe, the risk of terrorism is low and stable government prevails in the main—developments related to municipal elections that are to be held by November do raise some concerns.

The Mozambique National Resistance (Renamo), a former rebel group, has indicated that it intends to boycott the poll, and has threatened to pursue a campaign of agitation against President Armado Gubueza’s Mozambique Liberation Front (Frelimo). However, threats of civil disobedience are not always backed up with action, and history suggests that protests over economic issues, such as spiking prices for basic goods, are more likely to galvanise the population than demonstrations motivated by struggles for political power.

But while the risk of widespread political violence is fairly low, the possibility cannot be dismissed out of hand. Efforts to secure aid for communities damaged by flooding in the central and southern parts of the country are being undermined by allegations of corruption, which have already prompted one South Africa relief organisation to cease its operations in Mozambique. Given the high incidence of corruption, it is not inconceivable that unrest over the issue in flood-damaged areas could become a catalyst for protests elsewhere in the country.

In any case, the flooding will not have any major impact on the country’s economic potential. Real GDP growth rates have exceeded 7% per annum in recent years, reflecting the effect of expanding output from coal mining on exports, as well as rapid expansion of transportation and telecommunications activities.

Real growth of 8%, or even 9%, is possible during 2012-2014. Local sources indicate that coal production surged to four million tonnes in the first nine months of 2012, an eight-fold increase on the total for the same period in 2011.

Some 23 billion tonnes of coal are believed to lie in deposits in and around the provincial capital of Tete, notably along the border with Malawi. Exploiting the country’s mineral resources is not without its risks; Rio Tinto recently announced a $3 billion write-down on a Mozambique coal project purchased in 2011 for $3.7 billion, amid a dispute with the government over a proposal to transport the coal by barge along the Zambezi River. Nevertheless, major investment projects are moving forward. For example, a $10 billion liquefied natural gas plant is to be built by Italy’s Eni and US-based Anadarko, with completion scheduled for 2018.

Elsewhere on the economic front, inflation eased sharply from the double-digit rates of recent years in 2012, falling to an average of just 2.6% last year.

Despite expectations of generally stable commodity prices, inflation will rebound this year, boosted by the combined effect of tariff increases, monetary loosening and an unfavourable base effect.

Growth in minerals exports will not prevent the further expansion of the current account deficit, which widened to an estimated 27% of GDP in 2012, and is forecast to exceed 40% of GDP by 2014, the result of sustained strong demand for project-related imports. Balance-of-payments risks are mitigated by the fact that the large deficits are being driven by investment in the expansion of future exporting potential. Debt-financing of the shortfall will be held to a manageable level thanks to healthy inflows of foreign direct investment, and aid flows will enable the central bank to maintain reserves sufficient for 2.5–3 months of import coverage.

By Benedict McTernan, The PRS Group

Benedict McTernan is managing editor of The PRS Group, a consultancy focused on the quantification and analysis of country-level political, economic and financial risks. He specialises in coverage of the Americas and the MENA region.

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