Macroeconomic performance and outlook
Mozambique faced an economic slowdown in 2019, mainly due to the negative impact of cyclones Idai and Kenneth, with GDP estimated to grow by 1.9%. Eco- nomic activity slowed in 2016–18, to an average of 3.7%, compared with 6.7% for 2015. This reduction resulted mostly from a decline in public and foreign direct investment.
Inflation dropped to 3.9% in 2018 and 3.4% in 2019, reversing the high level reached in 2016 and 2017. Limited currency fluctuations since June 2017, stable food prices, and monetary tightening have supported the low inflation. The Bank of Mozambique has cautiously relaxed its monetary policy, bringing the basic inter- est rate down by more than 1,000 basis points since it reached its 23.25% year-on-year peak in 2016. The fiscal deficit remained fairly high, at 6.4% in 2019, given the high interest rate’s impact on debt repayments.
The current account deficit widened to 54.2% of GDP in 2019, against 29.5% in 2018. Higher imports, mainly pushed by the large investment projects needs for capital goods and services, drove this deficit. FDI and external loans partly financed the deficit, while international reserves fell to a still-comfortable $3.2 billion by August 2019.
Poverty, although reduced from 52.8% in 2003 to 46.1% in 2015, is still high, with nearly 80% of the poor living in rural areas distant from basic public services. Mozambique registered 20.7% unemployment in 2015, with youth unemployment at 30%.
Tailwinds and headwinds
GDP is expected to grow by 5.8% in 2020 and 4.0% in 2021. With offshore gas discoveries estimated at 180 trillion cubic feet, the country has the opportunity to diversify the economy while enhancing its resilience and competitiveness. The gas sector could upgrade subsistence agriculture into agribusiness, support Mozambique’s electrification through different energy solutions,
and foster other industries such as fertilizers, fuels, and metal-mechanic. It could also enhance macroeconomic stability, with higher revenues contributing to fiscal surpluses and a sovereign wealth fund buffering external shocks.
Infrastructure needs for natural resource-related projects could also trigger a cycle of private and public– private investments. Some state-owned enterprises, particularly those for infrastructure, are well suited to partner with local and international investors on deliver- ing such projects. Amplifying this potential, the govern- ment signed the third and “final” peace agreement with the opposition, paving the way for the demobilization and social reintegration of armed troops.
Mozambique’s budgetary deficit, expected to be 4.5% of GDP in 2020 and 4.3% in 2021, raises debt sustainability concerns. Major donors suspended budget support to Mozambique in May 2016 after the disclosure of “hidden debt,” and the country has been in official default since February 2017. The country is reducing its debt-to-GDP ratio, improving tax collection, and reaching debt restructuring agreements.
Mozambique is expected to run current account deficits averaging 65% of GDP in 2020–21. Gas exploration projects can add further vulnerability in the current account, as they increase the volume of imports substantially to operate the new fields. It adds further challenges on financing deficit pressures and managing international reserves.
Cyclones in 2019 caused supply shocks, destroyed infrastructure, and took the lives of hundreds of people. The economy remains highly susceptible to climate-re- lated shocks due to its geography and high-dependence on rainfed subsistence agriculture.
Low skill levels hinder employment and productiv- ity, while the fast-growing population pushes unemployment rates higher, particularly for youth. This gap reduces local companies’ ability to enjoy technology spillovers and connections to global value chains. With 30% of the population connected, low electrification further limits economic growth.
Health sector preparedness
Mozambique ranked 153 among 195 countries on the 2019 Global Health Security Index. With just one labo- ratory, Mozambique can conduct only an average of 10 COVID–19 tests a day. Due to the scarcity of financial resources and health and safety equipment, the country could face difficulties in providing isolation and treatment if the pandemic infects a substantial number of people.
Mozambique has applied health, social and economic mea- sures to respond to the pandemic, and given the limited fiscal space, it has requested $700 million from develop- ment partners to support for the potential health and mac- roeconomic crises. Key areas of support include strength- ening social protection and easing credit constraints.
The Monetary Policy Committee has been providing financial liquidity through a range of credit and macropru- dential measures. It reduced the policy interest rate by 150 basis points to 11.25%, cut bank’s minimum reserve ratio by 1.5 percentage points for local and foreign currency deposits, and introduced a foreign currency credit line of $500 million for banks to increase liquidity in the economy. It is also easing import licensing, exempting payment of import duties on medicines, reagents, and all COVID–19 prevention material and ventilators, and suspending val- ue-added tax on hygienic products. And it is forgoing fines on delayed tax payments and providing income tax grace until the end of 2020 for micro, small, and medium enter- prises and suspending covenants and actions related to banking debt.
Building health system resilience is key to strengthening capacity to face the COVID–19 and future pandemics. In the short term, measures to avoid a credit crunch, prevent job losses, and minimize the impact on the trade balance should be prioritized. These include implementating an adequate mix of monetary and fiscal stimulus and lever- aging social programs to increase coverage of vulnerable groups. Reinforcing mobile wallets and payments are also key to avoiding further contagion and minimizing income disruption risks to individuals.
Guide to Buying Bonds
Procedure for market participation
Banks or licensed stockbrokers are able to seek authorization from the Central Bank to participate in the Treasury securities market.
The financial settlement of transactions undertaken by the Banco de Moçambique is done on the third business day (T +3 system), at 8 pm. This includes the crediting or debiting the accounts of stock exchange operators and other intermediaries and authorized intermediaries.
The withholding tax on government and corporate bonds for foreign investors is 20%.
Openness to international investors
Law on Investment, No 3/93, created in 1993 (amended in 1993 and in 1995) is the one that governs foreign and domestic investment. There is no restriction concerning foreign ownership or foreign control of companies. Foreign investors may invest in the local stock exchange market; restrictions apply only on repatriation of funds. Residents are also allowed to hold foreign currency accounts in the foreign currency.
Foreign capital and domestic capital are treated equally in most cases, but getting proposed new investments approved by the government can be time-consuming. Although much of the economy is open to foreign investment, certain sectors are subject to specific performance requirements. Bureaucracy can be burdensome, and the legal system is inefficient and antiquated. Regulations can be applied inconsistently, and the system is prone to corruption.
Restrictions on foreign exchange and profit repatriation
Exchange control regulations need prior approval for the externalization of funds affecting convertibility, other than trade transactions, which should be supported by a full set of supporting documentation. In 2008, the Mozambican parliament passed new foreign exchange legislation that ensured the liberalization of all current account transactions. This made it possible for locals to make payments abroad without having to obtain permission from the central bank. However, capital transfers restrictions are still in force are subject to authorization from the central bank. There is no tax on currency transactions and the bid/offer spread is permitted to reach maximum 2%.
The domestic currency (Metical - MZn) is not convertible, either internationally or regionally. The Banco de Moçambique provides the necessary foreign currency (USD) as part of its intervention strategy and when need be. It is important to note that the limited supply of FX reserves may result in difficulties and delays in obtaining hard currency to satisfy the repatriation of funds.
Profit repatriation is guaranteed by the same law that rules investment in Mozambique, the Law on Investment, No 3/93. Non-residents and travelers can import any amount of foreign currency against declaration. However, only foreign currency previously declared may be re-exported. Payments and transfers are subject to maximum amounts (US$ 5,000), above which they must be approved by the central bank.
On September 2013, Moody’s assigned B1 to Mozambique’s issuer default, with a stable outlook.
On July 2013, Fitch upgraded Mozambique foreign currency issuer default ratings to B+ (from B) and affirmed the local currency issuer default rating at B+. On August 2013, S&P maintained the rating on Mozambique local foreign currency debt at B.
List of Primary Dealers
The primary dealers authorised by the Banco de Moçambique are the following: