Central bank governor Ernesto Gove is bullish about Mozambique’s economic prospects, but acknowledges that the banking sector and capital markets need to be developed for the country to truly benefit from its energy boom. 

Ernesto Gove, Mozambique’s central bank governor, is hardly alone in being bullish about his country’s future. Global investors also see the south-east African state as one of the brightest prospects in the region. Thanks to the recent discovery of huge reserves of coal and natural gas, foreign investment has soared. And growth in gross domestic product (GDP), which was about 7% in 2013, is forecast to exceed 8% this year, according to the International Monetary Fund (IMF).

Mr Gove, who has been governor of the Banco de Moçambique since 2006, doubts this buoyancy will be short-lived. “With the environment we’re building – one that will enable both domestic and foreign investors to invest – the conditions are there for growth to be sustained,” he tells The Banker in the Mozambican capital of Maputo. “The macroeconomic environment is stable. The currency is stable. Inflation is less than 5%.”

Bolstering stability

Mr Gove says macroeconomic stability will be bolstered once Mozambique starts selling liquefied natural gas, probably towards the end of this decade. The most immediate benefit will be to reduce the country’s large current account deficit, which was equivalent to 43% of GDP in 2013.

“As we go into an era of natural resources exportation, one of our shortcomings – a lack of foreign exchange – will be resolved,” says Mr Gove. “Today the current account is negative, mostly because of imports of equipment for [gas and mining] projects. This is causing huge deficits. We believe that by 2019 or 2020 we’ll have some space and that our current account will be in positive territory.”

Yet, Mr Gove recognises that for all the billions of dollars of revenues that coal and gas will bring, there is no guarantee they will significantly boost employment or cut poverty in what remains one of the world’s poorest countries, with a GDP per capita of less than $700. Diversifying the economy and developing labour-intensive industries are crucial, says the governor.

“We have before us huge challenges,” says Mr Gove. “How do you transform the economy without just relying on coal and gas? How do we use our natural resources to our advantage? We have to have some structural transformation. We can’t just be an exporter of raw materials. We have to have light industries and [fulfil] our agricultural potential.”

Sustainable boom?

Mozambique’s government will be hard-pressed to ensure the economy does not overheat. One of the central bank’s main aims is to keep the local currency, the metical, stable. It was fairly volatile in the first half of this year, losing more than 4% of its value versus the dollar. But Mr Gove argues that the current account deficit will not put pressure on the currency in the long term, as it is mainly caused by imports for the coal and gas projects and thus funded by foreign direct investment.

He also dismisses concerns that the government’s rising fiscal deficit – it is forecast to jump from 4.5% of GDP to 9.5% this year, which led ratings agency Standard & Poor’s to downgrade the country a notch to B in February – will fuel depreciation.

Mr Gove says a rise in foreign exchange reserves from $2bn in 2009 to $3.2bn in March this year, equating to four months of import cover, will help keep the exchange rate steady. “We used to have less than two months of cover,” he says. “Now, reserves are increasing as the economy and investment pick up. We’re in the range of four to six months, so we’re happy. But our [import] needs will increase in the coming years. We’ll continue building reserves so that we’re not in a position of scarcity.”

Minimal interventions

The central bank will maintain its policy of letting the metical float freely, says Mr Gove. Any interventions in the market will only be to control levels of liquidity. “It’s the market that determines the level of the exchange rate. It’s nothing to do with the central bank. It’s down to supply and demand. We just use [open-market operations] in case of some disturbances.”

In the longer term, some analysts believe Mozambique’s economy could suffer from an influx of dollar liquidity as gas revenues reach their peak. They point to fellow Portuguese-speaking country Angola, whose oil-rich economy became highly dollarised in the 2000s, as an example of what could happen.

Mr Gove says the central bank has already taken steps to avoid that outcome. A law from 2010 stipulates that companies have to convert 50% of their export earnings into meticais, while another from 2009 states that banks have to make provisions of 50% against foreign currency loans. Thanks to such measures, the proportion of lending in local currency increased from 67% to 78% between 2008 and 2013, according to the IMF.

“The process of de-dollarisation in Mozambique started a while ago,” says the governor. “The laws have worked. If you keep all your deposits in dollars, you’re not running your own monetary policy; it’s the US Federal Reserve that’s responsible for your monetary policy. Everybody in Mozambique benefits from the de-dollarisation of the economy.”

Improving the banks

Another priority for the central bank is to develop Mozambique’s commercial banking sector, which remains fairly unsophisticated by southern African standards, despite growing rapidly in the past few years. None of the lenders are listed, while the biggest three – Portuguese-controlled Millennium bim and BCI, and South African-owned Standard Bank – account for almost 80% of the sector’s assets. Several of the smaller ones are loss-making.

There has been a recent influx of foreign banks. In June, Togo-based Ecobank bought Banco ProCredit, a small local entity, shortly after South Africa’s Nedbank purchased 36% of Banco Único, a fast-growing lender set up in 2011. Meanwhile, London-headquartered Standard Chartered wants to obtain a licence to operate in Mozambique.

Mr Gove welcomes these moves, saying they will lead to the injection of more capital in the local banking system. He feels this is necessary if local banks are to play a part in the capital-intensive gas and coal sectors, rather than seeing all transactions made through offshore banks.

“The local banks need to increase their capital so that they can intermediate with exports of natural resources,” he says. “We are talking about huge money [being needed] for these projects.”

The central bank might increase the minimum capital requirement for banks from the equivalent of about $2.5m, as part of efforts to boost capital levels. “We’re revising this,” says the governor, but he does not give a timeframe or indication of what the new level would be.

Financial exclusion

Among Mr Gove’s main concerns are financial exclusion and high lending rates. Less than 20% of adults have bank accounts. Businesses struggle to access loans and, when they can, interest rates are about 20%, despite the central bank having halved its base rate from 16.5% to 8.25% since mid-2011.

Mr Gove says high lending rates are partly due to a lack of competition among big banks and the absence of credit reference bureaux, which makes it difficult to assess the creditworthiness of potential customers. “We have 18 banks, but there are just four or five big ones. With that number, you can’t say there is much competition.

“Of course, the banks will argue that we don’t have a credit reference bureau. That’s an issue, but the government has submitted a law to parliament to approve rules for establishing one. Another argument is that the standard of accounting [is poor], especially with small companies.”

Mr Gove wants more businesses to tap the capital markets. Mozambique’s bond and equity markets are among the least developed in Africa. Only four companies have listed their shares, while corporate bonds are rare. The government can help encourage bond issuance by companies and banks by developing a long-term funding curve, says Mr Gove (at present it rarely issues debt with a tenor of more than a year).

“For short- and long-term credit, everybody is looking at commercial banks,” says the central bank governor. "But because of the short-term nature of their deposits, they are not [able to provide] long-term loans. That’s where the capital markets can help. The government has been issuing some bonds. But for the deepening of the capital markets, we need more so that the yield curve goes out to, say, 15 or 20 years.”

Politicians have talked about making miners and upstream gas companies in Mozambique, such Anadarko Petroleum of the US and ENI of Italy, list a portion of their local assets on the country's stock exchange. But given its paltry size – its market capitalisation is $1.2bn – and illiquidity, bankers say that is unlikely.

The only way it would work, they add, is if foreigners were allowed to buy most of the shares. Today, there is little international portfolio investment in Mozambique, partly because of capital controls that require foreigners to get approval from the central bank for their transactions.

But in an encouraging sign for investors interested in Mozambique, Mr Gove says those restrictions should be removed. “We have to liberalise the capital account,” he says, arguing that the economy is strong enough to withstand capital outflows. “If the macroeconomic fundamentals are there, there is no reason to fear. The money can flow out, but it will flow back if you have good macroeconomic fundamentals.”


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