- Metical is second-worst performing African currency this year
- Mozambique Seeks $286 million IMF loan to shore up economy
Eighteen months ago, Mozambique was hailed by International Monetary Fund boss Christine Lagarde as a lodestar for African economic development. Now, with an anticipated natural gas-driven boom still years away, it has turned to the IMF for emergency cash to shore up its finances.
Eni SpA and Anadarko Petroleum Corp. have yet to commit to spend the billions of dollars required to tap offshore fields that Mozambique estimates may hold enough gas to meet global demand for more than two years. Just as a 40 percent slump in oil prices in the past year means companies aren’t rushing to develop projects, Mozambique’s coal exports have been hindered by inadequate ports and railways and a slump in demand.
Mozambique’s fall from grace has been accentuated by a defense spending scandal and a flare-up in armed conflict between security forces and heavily armed opposition party militants. The metical has weakened 43 percent against the dollar this year, the worst performer of 24 African currencies monitored by Bloomberg after Zambia’s kwacha.
“It’s becoming a bit of a siege economy,” Colin Waugh, an independent economist, said in an interview in Maputo, the capital. “They’ve got a crisis in the real economy and now a crisis on the financial side too. They don’t need a growing insurgency in two or three provinces while the economy has all these problems.”
Mozambique’s economy took off in 1993, after the end of 17-year civil war that pitted the Soviet- and U.K.-backed Front for the Liberation of Mozambique, or Frelimo, against the Mozambican National Resistance, a group known as Renamo that was supported by the white-minority governments of Rhodesia and South Africa. Annual growth averaged 7.5 percent in the past decade as Vale SA and Rio Tinto Plc poured money into coal mines and transport links, and Eni and Anadarko announced huge gas discoveries.
Mozambique attracted 57 foreign direct investment projects last year, the fifth most in Africa, a study by accounting firm EY found. Standard Bank Group Ltd., Africa’s largest lender, last year projected that the gas bounty would help boost gross domestic product for each Mozambican to $4,500 by 2035 from about $650 in 2013 after accounting for inflation.
The euphoria has faded along with the commodities rout, a slowdown in China and waning investor interest in emerging markets. The central bank burned through $600 million of reserves between September 2014 and March this year as it sought to support the metical, IMF data show.
“The government went into very big expenditure mode and borrowed like crazy because we were going to be rich,’’ Carlos Henriques, president of Mozambique’s Commerce and Industrial Association, said by phone from Maputo. “With the drop in commodity prices, investment in those big projects stopped. What was expected, in terms of job creation and wealth, has not materialized.’’
Investor sentiment took a further blow when it emerged that part of the proceeds of an $850 million bond sale designated to fund a state-owned tuna-fishing company fleet was used to buy navy patrol boats. The government later took $500 million of the debt onto its own balance sheet and reclassified it as defense spending. In August, Moody’s Investors Service cut Mozambique’s rating to B2 from B1, citing its deteriorating fiscal and debt metrics.
On Oct. 30, the IMF said it may give Mozambique’s government a $286 million emergency loan. The funding, which still needs IMF board approval, is conditional on the government implementing an 18-month program to restore stability, including curbing the budget deficit and raising interest rates.
Restoring faith in the economy will demand more than just fiscal discipline. President Filipe Nyusi will also have to end renewed hostilities between his forces and Renamo fighters that have claimed scores of lives over the past six months. Renamo has accused the government of rigging last year’s elections and twice trying to assassinate its leader, Afonso Dhlakama, allegations Nyusi’s administration has denied.
Renamo could disrupt mineral exports because Mozambique’s limited road and rail links traverse its strongholds, according to Ian Schechtman, an intelligence analyst at risk advisers Max Security Solutions.
“There’s not going to be a resumption of civil war,” he said by phone from Tel Aviv. “I don’t think they have the forces for that. They could organize smaller-scale attacks. These clashes we have been seeing recently are likely to continue.”
Alejandro Tawil, the Maputo-based chairman of ThirdWay Africa, a merchant banking and financial advisory firm, sees Mozambique’s current travails as temporary.
“The interest in Mozambique has not changed, although we see more caution on those projects more directly related to oil and gas development,’’ he said by e-mail. “This is still a fantastic investment story.”
Mozambique’s economic fortunes may hinge on whether the transformational gas projects go ahead, said Anne Fruhauf, vice president at New York-based risk adviser, Teneo Intelligence.
“Mozambique faces a challenging year,” she said by e-mail. “Inflationary pressures will mount and bread, power and fuel prices may have to increase. That will intensify the potential for social unrest.”