ECONOMIC OUTLOOK CONFERENCE
18 JUNE 2009 • HILTON SANDTON, JOHANNESBURG
Mozambique: Setting the Standards for the Southern Africa Region
Thea Fourie
Sub-Saharan Africa Economist
18 June 2009
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Mozambique Outshines in Southern African Region
Mozambique growth amongst the highest in
Southern Africa region
-10
-5
0
5
10
15
90
92
94
96
98
00
02
04
06
GD
P %
Gro
wth
Botswana Sub-Saharan Africa
South Africa Mozambique
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Growth Improves Living Conditionsof General Population
Nigeria
South Africa
Phillippines
Zambia
Kenya
GhanaEthiopia
Thailand
India
Uganda
Indonesia
Botswana
Mozambique
Vietnam
China
-4
-2
0
2
4
6
8
10
-20 -10 0 10 20
Per capita real growth
Po
ve
rty
he
ad
co
un
t
Rise in poverty and
positive growth
Rise in poverty and
negative growth
Fall in poverty and
positive growth
Fall in poverty and
negative growth
Source: IMF
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First wave of reforms”
Successful completion
of the
“first wave of reforms”
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Inflation Brought Under Control
Monetary policy stabilization policies control
inflationary pressures since 1996
0
10
20
30
40
50
60
70
80
88
90
92
94
96
98
00
02
04
06
08
Infl
ati
on
rate
Inflation rate M2 money supply growth
External shocks
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Trade Openness Improves
Openess of Mozambican economy continues to
expand
0102030405060708090
100
80 82 84 86 88 90 92 94 96 98 00 02 04 06Im
po
rts &
exp
ort
s a
s %
of
GD
P
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Exchange Rate Overvalued at Times
Seychelles
Swaziland
Botswana
Madagascar Malawi
NamibiaMozambique
South Africa
Comoros
Lesotho
Zambia
0
50
100
150
200
250
-10.0 -5.0 0.0 5.0 10.0 15.0
REER (y/y%) - average 2003-2007
Exp
ort
of
go
od
s a
nd
serv
ice
s a
s %
of
GD
P -
ave
rag
e 2
00
3-2
00
7
REER - negative growth indicates depreciation.
`
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Government Revenues Improve
Tariff reforms do not leave government revenue in
jeopardy
0
2
4
6
8
10
12
14
16
80
82
84
86
88
90
92
94
96
98
00
02
04
06
Tax revenue as % of GDP Taxes on international trade as % of GDP
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”GDP Composition Changes
1997: Agriculture Production accounts
for 37% of GDP
Agriculture
Manufacturing
Gas, electricity
and water
Other industry
Wholesale and
retail trade
Transport,
storage and
communication
Banking
Other services
2007: banking and manufacturing GDP
contribution rise
Agriculture
Manufacturing
Gas, electricity
and water
Other industry
Wholesale and retail trade
Transport,
storage and
communication
Banking
Other services
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Liberalization Attract Mega-projects
Pande-Temane gas project, Petroline, Cahora Bassa Hydro electrical power plant, Mozal aluminum producer, Mona titanium mine
Fixed investment spending rises
0
2
4
6
8
10
90
92
94
96
98
00
02
04
06
FDI as % of GDP
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“First Wave of Reforms”Exports, Aid & FDI Support Reserves
Rising exports, FDI and aid flows support reserve
holdings
0
10
20
30
40
5098
99
00
01
02
03
04
05
06
07
% o
f G
DP
0
500
1000
1500
2000
Millio
n o
f U
S$
Exports (left scale) FDI (left scale)
Aid flows (left scale) Gross reserve (right scale)
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Fist Wave of Reform”To Summarize …….
• Macro economic variables (GDP, inflation, exchange rate) gain stability under the first wave of reforms.
• Mozambique is placed on a more sustainable growth path due to a structural shift towards the secondary and services sectors of the economy.
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second wave of reform”
Challenges ahead to
implement
the
“second wave of reforms”
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”Key challenges
Improve the overall business environment
• Access to credit by the private sector remains problematic
• Institutional reforms – laws, rules and other practices that govern property rights – should be prioritized
Infrastructure deficiencies
• Electricity provision at the top of the list
• Communication and transportation sectors also less developed than other SADC countries
Government finances
• Align procedures and tax concessions for mega projects
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”Financial Sector
Financial system remains shallow despite recent
expansion
0
5
10
15
20
25
30
35
90
92
94
96
98
00
02
04
06
% o
f G
DP
M2 money supply Credit to the private sector
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”Financial Sector
Interest rate spread between deposit and lending
rates
02468
101214
Ch
ina
So
uth
Afr
ica
Bo
tsw
an
a
Nam
ibia
Mo
zam
biq
ue
Ug
an
da
Tan
zan
ia
%
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”Business Environment
Doing Business Rankings
- 10
10
3 0
5 0
7 0
9 0
110
13 0
15 0
Enforcing contracts
Property rights
Employing workersStarting a business
Trading across borders
Mozambique South Africa Botswana
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”Infrastructure
Infrastructure development lags behind
(98) Egypt
(70) South Africa
(49) Ghana
(46) Nigeria
(39) Botswana
(34) Zimbabwe
(34) Namibia
(19) Zambia
(15) Madagascar
(15) Angola
(14) Kenya
(11) Tanzania
(11) Lesotho
(7) Malawi
(6) MozambiqueMozambique (50)
Nigeria (53)
Madagascar (58)
Angola (61)
Zambia (62)
Egypt (98)
Botswana (95)
South Africa (88)
Namibia (87)
Zimbabwe (86)
Lesotho (81)
Ghana (79)
Malawi (75)
Tanzania (73)
Kenya (62)
% of population using animproved water source
Electrification rate
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”FDI: Mega-projects
• Mozambique, like Botswana and Chile has used the mineral sector as a springboard for development
• In 1999, the Mozambican government adopts legislation on Industrial Free Zones (IFZ)
• Special exemptions and tax reductions were negotiated on a project-by-project basis, leaving mega-projects contribution to government revenue at around 3%
• Projects could be exempted from VAT, excise duties, customs duties on capital goods and benefit from reduced corporate tax rates
• As a result, the Mozambican government received less fiscal revenue from these projects than is typical of most other countries
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”FDI: Mega-projects
• In 2007, government adopted new legislation that are in line with best international practice for the mining and petroleum fiscal regime.
• New legislation move away from ad hoc tax incentives to attract foreign investment, but instead move towards a fair, transparent and stable fiscal system that will also enhance economic linkages through formal arrangements between mining companies and communities.
• In 2008, Mozambique became member of Extractive Industries Transparency Initiative (EITI).
• Probably the best and most relevant progress made by Mozambican government in recent years.
Copyright © 2009 IHS Global Insight. All Rights Reserved.
“Second Wave of Reform”To Summarize …….
• Key challenges needs to be address under the second wave of reforms to ensure growth sustainability
• These include primarily improved doing business ranking, access to credit by the private sector, continued infrastructure rehabilitation and development, and improved revenue base for the government
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief Regional RiskSynopsis for Mozambique
GDP growth relationship between South Africa and Mozambique fade after 1992. Same conclusions apply for the relationship between Mozambique and South Africa industrial production
-10
-5
0
5
10
15
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
GD
P (
% c
ha
ng
e)
Mozambique South Africa
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief Regional RiskSynopsis for Mozambique
Key factors dictating South Africa’s dominance in Southern Africa region:
• Trade—primarily imports
• Electricity provision
• Remittances flows
• South African Customs Unions (SACU) proceeds, however, Mozambique is not a member of SACU
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Imports Dependency onSouth Africa High
0102030405060708090
100B
ots
wan
a
Co
mo
ros
Leso
tho
Mala
wi
Mo
zam
biq
ue
Nam
ibia
Sw
azilan
d
Zam
bia
Zim
bab
we
% Export to SA % Imports from SA
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Dependency on SA Electricity Provision Very High
14%
70%
80%
98%
60%
0%
20%
40%
60%
80%
100%
Le
so
tho
Bo
tsw
an
a
Sw
azil
an
d
Mo
za
mb
iqu
e
Na
mib
ia
% o
f c
on
su
mp
tio
n b
ein
g i
mp
ort
ed
Source: IEA Energy Statistics
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Mozambique’s Electricity Paradox
Source: IMF
119Imports
240Exports
1212007 Energy Trade balance
(US$ million)
950Of which Mozal
1,350Total consumption (in MW)
2,000Of which Cahora Bassa
2,400Total installed capacity (in MW)
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Remittance Flow Dependency Low
31.4%
1.2% 1.5% 0.3%4.5%
1.1% 0.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Mo
za
mb
iqu
e
Bo
tsw
an
a
Na
mib
ia
Le
so
tho
Sw
azila
nd
Za
mb
ia
Ma
law
i
Rem
itta
nce In
flo
ws a
s %
of
GD
P
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International RiskSynopsis for Mozambique
• Advanced economies were first hit by the systematic banking crisis in the United States and Europe
• Emerging markets in Africa with well developed financial systems (such as South Africa, Nigeria, Ghana, Kenya) were initially most effected by cross-boarder financial linkages through capital flows, stock market investors and exchange rates
• In financially less developed countries (such as Mozambique) growth and trade effects dominate, with lags
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International RiskSynopsis: GDP
Mozambique’s industrial production (of which around 63% consists of Mozal production and 25% of food and drink) growth lags by 1 year with advanced economies’ industrial growth
-10
-5
0
5
10
15
20
25
30
35
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09Ind
us
tria
l p
rod
uc
tio
n (
% c
ha
ng
e)
Mozambique Advanced economies, lagged 1 year
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International RiskSynopsis: GDP
• Manufacturing production in Mozambique averaged 3% in 2008, to ease below 0% in 2009. Advance economies recovery could only be witnessed in manufacturing growth numbers by mid-to-end 2010.
• Other sectors that will be influenced by the global economic slowdown include transport, storage and communication; banking and tourism.
• Ongoing public sector infrastructure development, especially roads and rail, and private sector fixed investment, could mitigate the impact of the slowdown. Large contribution of agricultural output to total GDP could also shield Mozambique from a GDP contraction in 2009.
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International Risk Synopsis: Employment
Employment and remuneration index (2006=100)
100
110
120
130
07q1 07q2 07q3 07q4 08q1 08q2 08q3 08q4
Employment index Remuneration index
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International RiskSynopsis: Balance of Payments
• Import bill falls during 2009 as food and oil prices slow.
• Export proceeds squeezed by lower commodity prices and slowing international demand.
• However, lower export receipts are likely to be offset by lower services and income outflows.
• A slowdown in capital inflows will be balance of payments neutral due to the high import content of the investment financed.
• Overall the balance of payments as % of GDP is expected to remain unchanged from 2008 at 20% of GDP
Copyright © 2009 IHS Global Insight. All Rights Reserved.
Brief International RiskSynopsis: Fiscal Balance
• External debt burden lowered on the back of Highly Indebted PoorCountries (HIPC) and Multilateral Debt Relief Initiative (MDRI).
• Debt distress currently low, but public debt could become rapidly unsustainable if a large primary deficit persists or if output growth slows significantly.
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
99 00 01 02 03 04 05 06 07 08 09 10 11
Primary deficit as % of GDP
ECONOMIC OUTLOOK CONFERENCE
18 JUNE 2009 • HILTON SANDTON, JOHANNESBURG
Thank YouThank You
Thea Fourie
Sub-Saharan Africa Economist
18 June 2009