mozambique: setting the standards for the southern africa ... · economic outlook conference 18...

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


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


“First wave of reforms”

Successful completion

of the

“first wave of reforms”


“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


“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


“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.

`


“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


“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


“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


“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)


“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.


“Second wave of reform”

Challenges ahead to

implement

the

“second wave of reforms”


“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


“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


“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

%


“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


“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


“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


“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.


“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


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


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


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


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


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)


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


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


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


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.


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


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


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

mozambique: setting the standards for the southern africa ... · economic outlook conference 18...

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