89921 M OZAMBIQUE E CONOMIC U PDATE August/2014 HIGHLIGHTS: • The economy grew by 7.5 percent in the first quarter of 2014 • Significant rise in government revenues boosted by capital gains taxes • Inflation remains in control with key interest rate unchanged Growth Strong growth in The economy registered a growth of Quarterly Real GDP Growth, y-o-y (percent) 15.0 the first quarter 7.5 percent in the first quarter of 20141. Growth in the first quarter of 2014 was 10.0 significantly higher than the quarter before. However compared to the same period last 5.0 year growth was 1.6 percentage points lower. Strongest growth performance came from the 0.0 secondary sector (11.5 percent), followed by I II III IV I II III IV I II III IV I the tertiary sector (8 percent) and the 2011 2012 2013 2014 primary sector (6.2 percent). Source: INE A breakdown of the growth in the various sectors shows different trends. Growth in agriculture has been reviving after the floods last year. While extractive industries remain one of the dynamics sectors of the economy, growth is more moderate compared to last year. The performance in the secondary sector improved significantly because of strong growth in major sub-sectors of manufacturing, construction, electricity, and water. Some of the sectors under services like financial services, hotels & restaurants, and trade and related services have been among the fastest growing sectors in this quarter. Some of these sectors have also been among the major growth drivers of the economy in the first quarter. Growth by sectors (%) Contribution to 1st quarter 2013 1st quarter 2014 GDP growth Agriculture (incl. fisheries) 1.3 5.5 1.3 Extractive industries 56.3 13.4 0.3 Manufacturing industry 2.9 12.5 1.4 Electricity and water -1.8 11.9 0.4 Construction 3.5 6.2 0.1 Trade and services 23.0 10.1 1.1 Hotels and Restaurants 10.4 11.0 0.3 Transport and communications 9.1 5.2 0.5 Financial services 60.6 19.3 1.1 Real estate 7.6 2.8 0.2 Public administration 8.4 6.7 0.4 Education 5.6 6.1 0.4 Health and social protection 7.8 6.6 0.1 Other services 5.5 2.2 0.0 Total GDP 9.1 7.5 7.5 Source: INE 1 GDP calculations have been revised so that the basket of goods and services included is more representative of current economic activities. The base year for real GDP calculations has also been changed from 2003 to 2009. 1/7 External sector Narrowing of Current Account Balance (US$ billion) Merchandise Trade Balance (US$ billion) 0.0 0.0 current account -0.5 deficit but low -0.5 -1.0 merchandise -1.0 exports -1.5 -2.0 -1.5 -2.5 -2.0 I II III IV I II III IV I II III IV I I II III IV I II III IV I II III IV I 2011 2012 2013 2014 2011 2012 2013 2014 Source: Bank of Mozambique Source: Bank of Mozambique The current account deficit in the first quarter of 2014 stood at US$ 1.1 billion. The deficit has narrowed compared to the same period last year by almost US$ 200 million. While the trade and services balance has remained more or less constant, there was a rise in current transfers compared to last year, which helped reduce the deficit levels. These large current transfers of US$ 621 million also include the capital gains tax payments made to the government in the first quarter and cover almost 38 percent of the goods and services deficit. In merchandise trade, value of exports reduced by almost US$ 100 million compared to last year. Compared to the first quarter of 2013, there has been a dip in exports of Aluminum, sugar and other goods. A general slump in export value may also be partly explained by the fall in coal price. This loss in export value has meant a widening in the merchandise trade deficit despite lower imports compared to the same time last year. According to preliminary reports for June International Reserves (US$ billion) International 2014 net international reserves stand at 3.5 Reserves cross around US$ 3.2 billion after a dip in the first 3.0 US$ 3 billion 2.5 months of the year. The rise came mainly 2.0 mark from a transfer of capital gains tax 1.5 amounting to US$ 520 million in March, 1.0 donor disbursements, government income 0.5 etc. However, this addition was offset by 0.0 Jun-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-12 Aug-13 several expenditures since the beginning of the year. Source: Bank of Mozambique Fiscal Sector Improvement in State revenue in the first quarter reached MT 31.9 billion with an increase in execution tax collection rate compared to last year. There was a significant jump in the tax revenues, especially income tax. Revenues from income taxes grew by as much as 59 percent in nominal terms and represented 44 percent of the total tax revenues collected in the quarter, compared to 36 percent during the same time last year. This is explained partly by the payment of capital gains tax worth MT 4.5 billion or 37 percent of the total income tax collected during this period. Excluding the capital gains tax would bring down the execution rate of income tax revenues significantly. Execution of taxes on goods and services was lower compared to last year and these taxes constituted 52 percent of the total tax revenue compared to 60 percent last year. Grants also contributed to an increase in the resource envelop with an execution rate over two percentage points higher compared to last year. Total expenditures reached MT 36.9 billion with execution rare remaining more or less unchanged compared to last year. Most of the resources (almost 73 percent) were devoted to current spending with relatively small shares for capital spending and financial operations (24 percent and 4 percent respectively). Execution in current 2/7 expenditure was two percentage points higher than last year while for capital expenditure it was almost a percentage point lower. Low execution of the capital expenditure has in large parts to do with the aftermath of the floods in the country, which resulted in delay of implementation of projects. Externally financed capital expenditure was low following delays in disbursement of funds by some external partners. A revision to the state budget 2014 was approved by the parliament on August 1st. Main changes to the budget include the following: - An increase in revenues from MT 147.4 billion currently to MT 153.1 billion, a rise of MT 5.7 billion coming from the payment of capital gains tax - An increase in spending from MT 240.9 billion in the current budget to MT 249.1 billion, a rise of MT 8.2 billion - Increased spending is mainly financed through the addition of the capital gains tax, carry forward balance of MT 2.2 billion and an internal loan - Allocation of the additional resources would go to areas like VAT reimbursements, internal investments, elections, personnel, goods and services, municipal transfers and budget reinforcements. State Budget Execution Rate for the first quarter of 2014 Actual Budget Budget Executed Execution Rate (millions MZN) (million MZN) (Jan-Mar) % State Revenue 147,372 31,905 21.6 Tax Revenue 126,558 26,971 21.3 Other Revenue 20,814 4,934 23.7 Grants 30,402 4,116 13.5 Total Expenditures 240,891 36,909 15.3 Current Expenditure 115,666 26,793 23.2 Compensation of employees 56,959 14,372 25.2 Goods and Services 25,018 5,656 22.6 Interest on Debt 6,347 1,204 19.0 Transfer payments 18,078 4,495 24.9 Subsidies 2,671 405 15.1 Other 6,593 662 10.0 Capital Expenditure 100,770 8,708 8.6 Domestically financed 42,490 5,850 13.8 Externally financed 58,280 2,858 4.9 Financial operations 24,456 1,408 5.8 Active 17,767 591 3.3 Passive 6,689 817 15.3 Financing 53,291 2,620 4.9 External financing 47,576 2,620 5.5 Domestic financing 5,715 0 0.0 Source: National Directorate of Budget, Ministry of Finance Inflation Inflation Rate, y-o-y (percent) Inflation Inflation in June 2014 reached 2.46 percent. 6 continues to be Monthly inflation rate was negative for a 5 4 low second consecutive month. The year-on-year 3 rate of inflation is lower compared to the 2 same time last year when the country was 1 faced with the aftermath of the floods in the 0 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 north. Food and non-alcoholic beverages and housing, water, electricity, gas and other fuels are among the largest contributors to Source: INE (IPC Maputo) inflation. 3/7 Monetary Policy Neutral policy The standing lending facility has remained Credit to the Private Sector stance by the unchanged at 8.25 percent for almost three 40% Central Bank quarters indicating a neutral policy stance by the Bank of Mozambique. Credit to the 30% economy as a proportion of the GDP 20% remained at more or less at 28 percent. While 10% this proportion remains relatively high when 0% compared to the same period last year, it Apr-12 Jun-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Oct-13 Dec-13 Feb-14 Apr-14 Aug-12 Aug-13 shows a flattening curve compared to its peak in September in 2013. Credit went to a Standing Lending Facility variety of sectors like agro-industries, Growth in credit to private sector Source: Bank of Mozambique extractive industries, trade, construction, transport and communications and manufacturing. Exchange Rate Mixed The Metical has remained relatively stable performance of against the US Dollar with a marginal annual Nominal Exchange Rates the Metical depreciation. The stability of the local 45 3.7 against major currency is partly due to the increased 40 3.5 currencies, availability of the foreign currency coming 3.3 however no from large FDI in mineral-based projects 35 3.1 major change in being offset by increasing imports. Between 30 2.9 trend January and May 2014, the Metical, showed 2.7 slight monthly depreciation against the South 25 2.5 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Aug-12 Oct-12 Feb-13 Apr-13 Aug-13 Oct-13 Feb-14 Apr-14 African Rand. However, it continues to appreciate against the Rand in annual terms. On the other hand, it has depreciated against USD Euro ZAR Source: Bank of Mozambique the Euro in annual terms despite a marginal monthly appreciation. No marked The index of real effective rate has remained Real Effective Exchange Rate change in the more or less stable in the past few months. (2010=100) REER over the However it still shows a trend of appreciation 160 past few months compared to last year. Most of this 150 appreciation comes from the nominal 140 appreciation against the Rand. 130 120 110 Nov-12 Nov-13 May-12 Jul-12 Sep-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Jan-14 Mar-14 May-14 Source: World Bank Staff Estimates 4/7 Economic Prospects Strong growth Forecasts for global growth have been forecasts for revised downwards to 2.8 percent from Mozambique 3.2 percent earlier. Recovery in the bolstered by coal developing world is also expected to be and gas Commodity price forecast (2010=100) slower than previous forecasts. While growth 155.0 production; in Mozambique is projected to be well above however 135.0 the sub-Saharan African average, with exposure to burgeoning activities in the coal and gas 115.0 external risks sectors, it remains vulnerable to external pose significant 95.0 risks, especially commodity prices. While threat to growth high income economies are showing signs of 75.0 prospects recovery, a lower than expected demand for 2011 2012 2013 2014 2015 2016 2017 2018 2019 Mozambique’s key export commodities Energy Metals & minerals Agriculture Fertilizers cannot be ruled out. Metals prices have Source: World Bank GEP already declined by 30 percent since their peak in 2011 and forecasts for prices have been revised further down than before. A faster than expected decline in metal and energy prices could affect growth in Mozambique. This would also significantly impact investments in the country. Economic & Political News The International Monetary Fund at the second review of the Policy Support Instrument (PSI) states that Mozambique’s macroeconomic outlook remains stable however challenges regarding fiscal and debt sustainability persist. While fiscal stance for 2014 is expansionary, partly reflecting some temporary factors - spending for the upcoming IMF praises elections - and public investment, fiscal consolidation will be needed in the medium progress in the term. It stresses the need for structural reforms on public financial management, country but monetary policy tools and banking supervision, and business facilitation to be urges caution implemented vigorously. Foreign aid is expected to reduce over the medium term, while there would be a rise in non-concessional loans, stressing the need to improve investment planning and implementation in order to make efficient use of resources and ensure debt management and sustainability. Taxes paid by oil, gas and mining companies have increased manifold from US$ 39.5 million in 2008 to US$ 112.7 million in 2011. According to the fourth Extractive Industries Transparency Initiative (EITI) report, discrepancies between the amount of taxes and other payment recorded by the Government on the one hand and EITI report 23 mining and 16 hydrocarbon firms on the other was US$ 0.5 million or 0.4 percent of shows total payments in favour of the state. The discrepancy in records, provided by financial significant rise advisory firm Intellica, has dropped compared to 2010 (0.7 percent of total payments) in payments and is less than the maximum acceptable margin of three percent. Discrepancies in most part have to do with incorrect filling of the forms, inconsistent time period (submission of records by financial year than by EITI’s requirement of calendar year) and failure to submit the form (in two cases). Several parties According to data released by the National Elections Commission (CNE), thirty parties, registered for coalitions three and two groups of citizens registered for the general elections the elections (presidential, parliamentary and provincial assembly) of 15 October. The three main later in the Mozambican parties, namely the Liberation Front of Mozambique (Frelimo), in power, year the Mozambican National Resistance (Renamo), the main opposition party, and the 5/7 Democratic Movement of Mozambique (MDM), the third largest political force in the country had their registration approved by the CNE. They have already selected their candidates – the central committee of the ruling Frelimo Party chose former defense minister Filipe Nyusi, National Resistance Movement of Mozambique (RENAMO) chose their leader Afonso Dhlakama, while the Mozambique Democratic Movement (MDM) chose its leader and Mayor of Beira, Daviz Simango. There have been several rounds of negotiations between the Government and the RENAMO, following numerous clashes between the army and the armed elements of the latter in the central part of the country. Traffic a 60 mile stretch in Sofala was disrupted Impact of due to frequent attacks on the military convoy and there several deaths reported. A new recent political peace accord now seems imminent even though some points brought to the table by and military RENAMO still need to be agreed upon. The military tensions however have had an tensions felt impact on the economy. Insecurity on roads has led a group delaying its investments across the worth € 140 million in the country. Tourism in the country has also received a blow economy with figures indicating that the country may have lost upto US$ 10 million due to large scale cancellation of trips. The annual review of the G19 donor group was finalized with a commitment of US$ 275 million in direct budget support for 2015. Compared to last year, there is a decline of 11 percent. Foreign aid which until recently constituted about half of the Mozambican budget, has declined in recent years to reach less than a third currently. The downward trend is expected to continue in the coming years as Mozambique Downscaling in expands its internal resource base presenting an opportunity to reduce aid dependence. Mozambique However part of the reason for declining aid has also to do with concerns over State budget corruption claims and lack of transparency. The controversial state-backed bond sale support recently of over US$ 800 million to finance the purchase of a tuna fishing fleet led to donor discontent. Norway along with Belgium, the Netherlands and Spain have pulled out from direct budget support. Germany and the United Kingdom have also delayed committing funds. On the other hand, funds earmarked for sectors such as agriculture and health are increasing instead of giving it to the government. Mozambique saw a slight decline in the Country Policy and Institutional Assessment (CPIA) rate according to a recently released report. The performance of each country is measured against 16 criteria grouped into 4 clusters namely, economic management, structural policies, policies for social inclusion and equity, and public sector New CPIA management and institutions. Mozambique’s CPIA rate for 2013 stood at 3.6, a decline report of 0.1 points compared to 2012. Its score remains above the average of the 39 sub- published Saharan African IDA countries, which is 3.2. Of the different clusters, highest performance score of 4.2 was registered in economic management. The lowest score of 3.3 in public sector management and institutions is largely due to poor performance in the criterion of “Property Rights and rule based governance” which stands at 2.5. According to its new chairperson, Vale-Mozambique made an operational loss of over US$ 44 million in the first quarter of 2014. The main reason for the loss includes a fall in coal price from its peak of US$ 350 in 2011 to less than US$ 100 currently. Costs of Vale registers transporting the coal from the mine in Moatize to Beira are close to US$ 66. Moreover, loss in the first due to a lower demand, of the million tonnes mined only 650,000 tonnes was sold in the quarter; seeks first quarter. Vale is in discussions with the government and other partners about reduction in measures that could be taken to cut on the losses while producing more coal including a government revision n tax rates. Vale-Mozambique paid US$ 18.4 million in taxes in the first quarter. taxes The Government is holding discussions with major mining companies to help them out of the depressed market however there won’t be any tax breaks. 6/7 The Environmental Investigation Agency (EIA) in its report revealed that 93 percent of logging in Mozambique in 2013 was illegal. Surveys conducted in 2013-14 show that the key factor for forest crime was the rising demand for wood, especially from China. The report reveals that 76 percent of global exports were extracted in excess of timber Mozambican harvest registrations and was illegal. Continued extraction of these handful commercial forests timber species could lead to depletion of stocks in the next 15 years. Moreover, this endangered by illegal trade has deprived Mozambique of over US$ 146 million in taxes since 2007. illegal exports Mozambique became the largest African supplier of timber to China in economic value, of wood however 46 percent of Chinese imports from Mozambique were smuggled out of the country. Consequently, the EIA recommends that timber exports be suspended immediately until a sustainable solution to the problem is found. The government of Mozambique plans to hold a public tender for national companies for coal prospecting and geological research in the mid-Zambeze basin. Licenses would Coal be granted in 12 blocs situated in the Marávia, Zumbo and Changara districts of Tete prospecting in province and the Guro district in Manica province to eligible companies with the best Mozambique’s proposal. The government aims to reserve the tenders for Mozambicans in an attempt mid-Zambeze to ensure direct advantages for national enterprises in the exploitation of national reserved for mineral resources. Figures suggest that while over 110 licenses for mining have been national issued to 45 national and foreign companies, the participation of Mozambicans in the companies process remains very low. The Anglo-Australian mining company Rio Tinto is to sell its coal assets in Mozambique to International Coal Ventures Private Limited (ICVL), a joint venture set up by the Indian government for the acquisition of coal assets overseas to meet the coal needs of state-owned companies. for US$ 50 million. Rio Tinto Coal Mozambique has a 65 percent stake in the Benga open cast coal mine and two other projects in the western Rio Tinto sells province of Tete. It bought the assets for US$ 3.9 billion. However, a reassessment of the its assets recoverable reserves, falling coal prices and problems with transporting the coal to ports for exporting to market wiped out almost all of the book value. According to Rio Tinto, the sale is subject to certain conditions and regulatory approval. However, the transaction is expected to be completed in the third quarter of 2014. 7/7