80184 M OZAMBIQUE E CONOMIC U PDATE July/2013 HIGHLIGHTS: • Mozambique's economy grew at 4.8 percent p.a. in the first quarter of 2013. • Real effective exchange rate stable throughout last year despite strengthening towards South African Rand • Growth in credit to the private sector is gaining pace as the Bank of Mozambique lowers main interest rate further • Government plans large increases in wages for public workers, this will be included in a revised budget proposal sent to the national assembly, together with other budget revisions to fund reconstruction and rehabilitation activities related to the floods • Despite increasing credit to the private sector and rising public spending, inflation (5.2*percent) has been kept at bay by rapid depreciation of South African Rand. Growth Mozambique’s In the first quarter of 2013, growth in GDP Real GDP Growth Rate (y-o-y) economy grew at was lower than in previous years at 10 4.8*percent p.a. in 4.8*percent p.a. A deceleration in growth was 8 the first quarter of expected due to the extensive flooding of the 6 2013 Limpopo Valley in January. Agriculture, which constitutes around 23 percent of GDP, 4 registered a negative growth rate of 2.6 2 percent compared to the first quarter of 0 I II III IV I II III IV I 2012. Also the manufacturing sector 2011 2012 2013 contracted at a rate of 4.2 percent p.a. The largest positive contribution to growth is found in Transports and Communications, which grew 23 percent and Contributed with 2.4 percentage points to the total growth in GDP. Extractive Industries, which is the fastest growing sector, contributed 0.5 percentage points to the growth in GDP. Real GDP Growth in 2012 by sector (percent p.a.) 1st quarter 2012 1st quarter 2013 Agriculture 4.1 -2.6 Extractive industries 23.8 39.1 Manufacturing industry 2.8 -4.2 Trade and services 8.2 1.6 Electricity and water 6.7 -1.5 Construction 11.0 8.4 Transport and communications 1.6 23.3 Financial services 9.2 15.6 Public administration 8.9 7.2 Education 13.2 9.7 Health and social protection 8.1 6.9 Total GDP 5.9 4.8 Source: INE 1/6 External sector Record current Current Account Balance (USD million) Merchandise Trade Balance (USD million) account deficit by 0 0 end of 2012 -500 -500 -1000 -1000 -1500 -1500 -2000 -2000 I II III IV I II III IV I II III IV I II III IV 2011 2012 2011 2012 Source: Bank of Mozambique Source: Bank of Mozambique In 2012, the deficit of the external current account balance grew by 73.4 percent to reach USD 5,195 million. The large deficit is explained first of all by the increase in imports of goods by around 15 percent compared to 2011 whereas exports grew at a much slower pace. Secondly, growth in foreign direct investments in the so-called mega projects has also contributed to the deficit, since most projects, still in the construction phase, are relatively import intensive. The large current account deficit is mirrored by a large surplus in the financial account reflecting FDI inflows. Relative to the economy as a whole, the deficit on the current account balance reached 35.4 percent of GDP in 2012. International The stock of gross international International Reserves (USD billion) reserves amounted reserves has brought an end to its 3 to USD 2.2 billion by end of May. downward trend and stabilized 2 around USD 2.2 billion in May 2013. This is mainly the result of the 1 disbursement of donor funds to the general budget. As the stock of 0 mar 13 jan 13 may 12 sep 12 jul 12 nov 12 may 13 reserves is sensitive to exchange rate fluctuations, it is likely to increase if the South African Rand Source: Bank of Mozambique regains some of its former value. The stock of international reserves resembles around four months’ worth of imports. Fiscal Sector The state budget for 2013 which was approved on January 7th, estimates a deficit of MZN 61 billion due to revenue of MZN 114 billion and expenditures of MZN 175 billion. Internal resources stand for 86 percent of the budget while external donations and credits amount to 9.1 and 5.2 percent respectively. In the first quarter of 2013, the balance stood at MZN -730 million, which is more than a third of the budgeted deficit for the year. Compared to the first quarter of 2012, the most important factors that 2/6 have contributed to improved revenue are income tax (up 44 percent), value added tax (up 25 percent), and mega-projects (up 160 percent) which now contribute with 7.7 percent to revenue. In relation to the first quarter of 2012, government expenditure on wages has increased by 11 in real terms. This is likely to increase further if and when the budget alterations discussed in May are implemented. Realized Budget Jan-Mar 2012 and 2013 (Million MZN) 2012 (Jan-Mar) 2013 (Jan-Mar) Value % of budget Value % of budget Internal Resources 18,959 19.2 24802 21.1 State revenue 18,959 19.8 24802 21.8 Internal loans 0 0 0 0 External Resources 6,865 10.7 4137 7.2 Grants 5,831 16.8 2624 13.2 Loans 1,034 3.5 1513 4 Total Resources 25,824 15.8 28940 16.5 Current Exp. 19,722 23.3 21249 21.8 Development Exp. 7,133 10.8 7521 10.8 Financial Operations 975 7.5 899 10.1 Total Expenditure 27,830 17.0 29,670 16.9 Balance -2,006 -730 Source: Ministry of Finance Inflation Inflation reaches The annual inflation rate rose to 12-Month Inflation (percent) 5.2 percent p.a. in 5.2 percent in June 2013 in 6 June Maputo; a figure that hides the 5 fact that prices decreased by 0.86 4 percent between April and June. Inflation, however, has 3 accelerated in the first half of the 2 year compared to the very low 1 inflation rate of 2012. Further considerations, such as recovery 0 may 2012 nov 2012 may 2013 sep 2012 mar 2013 jul 2012 jan 2013 of food production in the Chókwè-area after the floods and the relatively weak South African Rand, suggest that inflation will Source: INE (IPC Maputo) remain benign during the year. Despite growth in government expenditure and the credit to the private sector. 3/6 Increasing food Food prices have generally risen Food prices (December 2010=100) prices since the beginning of the year, but 120 only moderately. Between January 110 and April, prices on maize have increased 6 percent and wheat 100 4 percent, whereas the consumer 90 price index in the same period grew 2 percent. Compared to a base of 80 apr-12 jun-12 aug-12 oct-12 dec-12 feb-13 apr-13 December 2010 prices hikes on both wheat and maize are still lower than the overall basket behind the CPI. Maize Wheat CPI Source: SIMA Monetary Policy Standing Lending The Bank of Mozambique lowered SLF rate and credit growth Facility lowered to its key policy interest rate, the 25% 9*percent; credit 20% growth accelerating Standing Lending Facility (SLF) to an all-time low of 9 percent on June 15% 10% 11th 2013. The decision to lower the 5% interest rate is based on the positive 0% inflation figures. During the last Jun/12 Aug/12 Oct/12 Dec/12 Feb/12 Apr/12 Feb/13 Apr/13 year, credit to the private sector has grown to MZN 114 million in April Standing Lending Facility compared to around MZN 92 million Growth in credit to private sector last year – an annual growth rate of 23 percent, which is the highest Source: Bank of Mozambique experienced since April 2011. Overall stability of In April and May 2013, Mozambique’s the nominal exchange exchange rate despite appreciation rate kept its position Real Effective Exchange Rate towards the South against the USD (at 140 African Rand. almost 30 meticais per dollar) and the EUR 130 (at 40 meticais per 120 2010=100 Euro). The South 110 African Rand, 100 however, has 90 depreciated, affecting trade and prices in 80 may-10 sep-10 may-11 sep-11 may-12 jan-10 jan-11 jan-12 sep-12 may-13 jan-13 Mozambique; this is also reflected in growing imports from Source: World Bank staff calculations South Africa. 4/6 The Real Effective Exchange Rate (which compares the Metical to the Euro, US Dollar and SA Rand taking into account local inflation) does not reveal any significant appreciation of the Metical, however. Nominal Exchange Rates, Jan 1, 2012 to June 16, 2013 45 4.0 40 3.7 35 3.4 30 3.1 25 apr-12 2.8 apr-12 jul-12 aug-12 sep-12 apr-13 mar-12 may-12 jan-12 feb-12 jun-12 oct-12 nov-12 dec-12 jan-13 feb-13 mar-13 mar-13 may-13 MZN/EUR MZN/USD MZN/ZAR (right axis) Source: Bank of Mozambique Economic News Three weeks strike Doctors and health workers throughout Mozambique have been striking for in medical sector three weeks, demanding a 100 percent wage increase for doctors. In has ended without further concessions previous rounds of discussions the government had already agreed to on wage demands. increase the wages of doctors by 15 percent, above the wage increase for other civil servants. The wage increases, to be included in a revised budget proposal, still have to be approved by the national assembly. The Minister of Finance argued that given Mozambique’s public sector wage bill at 10.5 percent (significantly higher than most peers) there is little room for further wage increases at this point in time. Opposition group The confrontation between Renamo and Frelimo continues to escalate, and Renamo threatens in a recent press release Renamo threatened to attack the Sena line to to “paralyse� coal export line disrupt coal exports. Such an attack would significantly disrupt current exports but it could also affect investor sentiment on Mozambique and the coal sector in particular. Although talks between the government and Renamo are soon to be resumed, the instability has already caused Rio Tinto to suspend coal exports using the Sena line. Vale – the largest coal extractor in the country – will continue to use the rail link, but increase security. Rovuma basin Indian state groups ONGC and OIL pay US$ 2.48 billion for 10 percent of natural gas shares Area 1 block in the Rovuma basin off the coast of Cabo Delgado. Both in change hands 2012 and early 2013, the government of Mozambique has registered three- digit million amounts in capital gain taxes related to similar transactions. If taxed at the established rate of 32 percent, this sale could generate around US$ 500 million. Revenue received from capital gain taxes are earmarked by legislation to be used for either public investments or to pay back debt. 5/6 Economic Prospects Development in Prices on commodities Commodity price forecast (2005=100) commodity prices important for the Mozambican 300 economy continue to follow a downward trend globally. 240 However, compared to the last 180 Global Economic Prospects, price forecasts on both energy 120 and metals have been adjusted 2010 2011 2012e 2013f 2014f 2015f upwards around 1 and 5 index Energy Agriculture points respectively for 2013. Fertilizers Metals Source: GEP June 2013 6/6