Economic performance and outlook: Mozambique has yet to recover from the economic downturn that started in 2015. The combination of declining prices for traditional export commodities, persistent drought effects from El Niño, internal military confrontations, and large decreases in foreign direct investment (FDI) nearly halved the past decade’s 7% GDP historical average growth to 3.8% in 2016. This drop was compounded by the 2016 governance crisis, which reduced external financing and donor support. The recovery of GDP growth to an estimated 4.7% in 2017 and a projected 5.3% in 2018 is due to increased coal exports and agricultural production; other sectors are likely to underperform.
Macroeconomic evolution: In the financial crisis following the 2016 disclosure of secret debts worth nearly 10% of GDP, the debt-to-GDP ratio reached an estimated 125% at the end of 2016, while the metical registered a 40% devaluation against the U.S. dollar and inflation suffered a 10-fold increase to 19.8%. With a strong monetary policy tightening by the Central Bank, assisted by higher coal exports, the metical recovered 16% and stabilized, and inflation abated to 16% in September 2017. International reserves reached 5 months of import cover ($2.2 billion). After years of expenditure expansion that pushed debt to unsustainable levels, the government defaulted on its sovereign bond in January 2017. Faced with financing constraints, the government is implementing a fiscal consolidation effort. Expenditure as a share of GDP is forecast to decline from an estimated 33.9% in 2017 to 30.5% in 2018. The projected deficit after grants in 2018, excluding repayment of debt capital, is 6.9% of GDP, down from the estimated 7.1% in 2017.
Tailwinds: Due to infrastructure improvements and rising international prices, minerals exports will be the main contributor to growth in 2017 and 2018. By end of June 2017, the mining sector registered a 59.4% year-on-year increase, driven by strong exports of coal, as well as graphite, titanium, rubies, and iron ore. Better weather patterns facilitated 2.2% growth in agricultural production, the mainstay of the economy. From a structural perspective, FDI inflows are expected to be a main growth driver. The ongoing initial development stage of the first offshore natural gas extraction project is expected to be followed by exploration projects in other offshore areas, potentially bringing FDI to over 40% of GDP, in line with 2013 levels. The pre-investment decision preparations for the large-scale onshore liquefied natural gas projects continue to progress. The projects’ sheer magnitude, estimated to double GDP within 10 years, will continue to be the main positive for Mozambique.
Headwinds: Discussions with the International Monetary Fund on a new support program have stalled due to the governance crisis; the fiscal position is fragile and deteriorating. Despite the fiscal consolidation effort, if international financing does not resume, the country faces challenges to its ability to continuously finance its deficit domestically; it already systematically resorts to financing from the Central Bank. The 2018 budget is silent on the restructuring of the $2.2 billion in defaulted sovereign commercial debt, which has a debt service–to-revenue ratio above 30%. Public arrears to the private sector are estimated to exceed $500 million (4% of GDP). The private sector is further strangled by high credit rates (on average 35% for a one-year commercial loan) and depressed private consumption. The result is a contracting real economy, except for the primary sector and some services. Despite the positive developments of the permanent ceasefire between opposition elements and the government, recent attacks by newly arrived terrorist groups in the gas-rich Northern Province cast new shadows over the investment environment.
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: