Mozambique is one of the financial world’s best-kept secrets. The south-east African nation is forecast to be among the 10 fastest growing economies in the world, according to the International Monetary Fund, which predicts an average annual growth in gross domestic product (GDP) of 7.6% from 2010 to 2016.
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But as is common with many other countries in sub-Saharan Africa, the story behind the growth is one of agriculture and natural resources rather than home-grown financial and business activity. About two-fifths of GDP comes from farming and food, and another 20% from manufacturing, which mainly comprises mining and gas. Financial services are small as a share of the economy and the capital markets are undeveloped, especially compared with neighbouring South Africa.
Challenges ahead
An extensive review of the country’s financial infrastructure by consultancies Swiss Capital Partners (SCP) and Finantia Advisory Services, both based in the capital Maputo, says that finance is Mozambique’s Achilles’ heel.
“The high cost of money, the difficulties to access funding, and especially the lack of relevant information on alternative financial products are still the key financing problems in the private sector in Mozambique,” says Salimo Abdula, president of the Confederation of Business Associations, the main employers’ organisation in the country.
Mozambican authorities understand the need for strong, liquid capital markets. Small and medium-sized businesses are widely considered to be the biggest creators of employment and their growth depends on vibrant debt, equity and venture capital markets. Policy-makers have therefore implemented a comprehensive financial sector reform programme, focused on bank regulation and designed to make local banks stronger and more robust. Early results have been encouraging, including a dramatic reduction in non-performing loans from 14.4% in 2003, when financial reform began, to just 2.9% in 2009.
Banking concentration
But the authorities have been less successful in their attempts to open the sector to competition, even though this should help reduce interest rates, lending charges and fees. There are 14 banks operating in Mozambique, but lending is concentrated in the hands of just four players: Banco Internacional de Moçambique (BIM), Banco Comercial e de Investimentos (BCI), Standard Bank and Barclays Bank Mozambique (BBM). “The banking sector remains highly concentrated,” says Patrick Raleigh, Africa analyst at the Economist Intelligence Unit. “Four banks have 90% of deposits.”
Moreover, all four lenders are majority owned by foreign institutions – BIM and BCI by Portuguese banks Millennium bcp and Caixa Geral de Depósitos, respectively; Standard Bank by the eponymous South African group; and BBM by Barclays of the UK. And of the 14 banks in the country, only Moza Banco is majority-owned by private domestic investors, having been set up three years ago to focus on corporate and investment banking and some securities trading. Three other lenders cater to the microfinance market, while the rest serve the corporate and retail sectors.
Banking is also concentrated in the cities, meaning that of Mozambique's 128 districts, 84 have no access to banking services at all.
Potential for growth
According to World Bank statistics, 103 out of every 1000 Mozambicans have a bank account, the lowest rate in Africa. Given Mozambique’s population of 22.9 million, this leaves a huge potential market of people who do not currently have access to a bank account. Furthermore, just 14% of firms have a credit line.
The World Bank’s benchmark Doing Business report shows the country ranks 128th out of 183 in terms of accessibility to credit. External observers and local policy-makers are keen to change this, but they need to understand why competition is so constrained before they can take steps to encourage it.
According to the World Bank’s latest assessment of the financial sector, banks in Mozambique operate in an environment with "relatively poor judicial efficiency, property registration, and credit information. Consequently, almost all loans and advances are over-collateralised at about 100% using cash, real estate or personal guarantees,” it says.
This over-collateralisation did help the banking sector to avoid contagion from the 2008/09 global financial crisis. Nonetheless, the bias towards foreign ownership means that risks remain.
Portugal connection
Victor Lopes, an analyst at Standard Chartered, highlights the strong presence of Portuguese banks, suggesting this could have adverse consequences for Mozambique, given Portugal’s vulnerable situation, its recent International Monetary Fund (IMF) and EU-led bail-out and the fragility of the euro on a broader scale.
“Should the current sovereign debt crisis in the euro area escalate, there could be a decline in external financing and an impact on lending to the corporate sector,” he says.
Other forms of finance are available but apart from pure, bank-led corporate finance, Mozambique’s debt and equity markets are still in the very early stages of growth. According to the IMF, for example, the country has been slow to foster non-bank financial intermediaries and corporate debt and equity markets. “These remain small and underdeveloped,” it says.
Even where non-bank finance is on offer, it is focused on the larger players. “There is a political programme to expand credit to smaller companies, but it is hard to make it profitable for the banks. Economic growth is very much driven by minerals, which is enclave development in that it is very capital intensive, does not create jobs and therefore does not stimulate demand for financial intermediation among the wider population,” says Mr Raleigh.
Encouraging growth
The government has launched initiatives to encourage capital markets growth by lowering start-up and other costs, particularly in rural areas. This has led to rapid growth in microfinance institutions, albeit from a small base. Between 2003 and 2008, the number of microfinance institutions trebled from 19 to 87. Even so, high concentration means that four microfinance institutions control more than 60% of the loan portfolio.
Figures show that across the country as a whole, venture capital is at a similarly nascent stage. An analysis of 10 initiatives in the Mozambique market by SCP found the domestic market was still "small and fragile".
“Mozambique is not an ideal market for venture capital, given the difficult business environment,” says Jane Grob, managing partner at SCP. She points to high taxes on capital gains and dividends, the absence of a developed capital market and insufficient corporate governance and accounting standards.
“The challenge to overcome these constraints is undoubtedly a big one and will require some time,” she adds. SCP advocates several reforms to stimulate the market, such as reducing taxes on capital gains and dividend payments, and deregulating pension fund investments.
Stock exchange star
Nonetheless, there are some bright spots in Mozambique’s financial firmament. The Mozambique Stock Exchange, for instance, has developed rapidly over recent years. Its members’ market capitalisation has ballooned from $60m to $436m in the decade to 2009 and recent activity has been robust. The exchange remains a minnow compared with the Johannesburg bourse, but it is upbeat about its future.
“The Mozambican market is a long way from maturity,” says André Nogueira, managing partner at Finantia Advisory Services. “But the exchange will develop very positively, and the private sector will come to understand how to make use of this very important instrument at its disposal for its own financing.”
Mozambique considered dipping its toe in the sovereign bond market last year. Turbulence linked to the eurozone crisis forced the country to shelve its plans but the idea may be revived soon. Mozambique has a B+ credit rating from Standard & Poor’s, the same as that of Senegal, which sold a $500m bond in May. Angola, also rated B+, plans to come to the market in September and some say Mozambique should follow suit.
The country does have a domestic bond market with maturities up to five years. In 2009 the National Treasury Directorate issued debt totalling 290m meticais (about $10m), with a 12.5% interest rate. However, this market remains relatively small; trading is light and few bonds are listed.
Foreign investment
It seems clear, however, that economic expansion will facilitate financial market growth. Ernst & Young says that financial services were the fourth largest beneficiary of foreign direct investment in Mozambique between 2007 and 2010, after energy, food and tobacco, and metals.
Against that, the country still has an image problem for many foreign investors, thanks primarily to the high levels of poverty and the prevalence of HIV. One in eight adults has contracted the virus and the stubborn presence of other infectious diseases has a severe impact on human welfare. The country has a low life expectancy at birth of 42 and a high under-five mortality rate of 142 deaths per 1000 people. Neighbouring Tanzania, by contrast, had a life expectancy of 55 and an infant mortality rate of 108 at the end of 2009.
As Ernst & Young concludes in its latest annual Africa Attractiveness Survey, Mozambique’s poor population and high levels of bureaucracy mean it will probably remain "only moderately attractive to investors over the medium term".
Nonetheless, if says the authorities are succeeding in cutting red tape and long-term prospects are improving. “Foreign direct investment has a particularly important role to play as a future source of longer-term capital for reinvestment in infrastructure initiatives and as an accelerator of sustainable growth,” says Ajen Sita, Ernst & Young’s managing partner for Africa.
Optimism prevails
Mr Raleigh at the Economist Intelligence Unit believes there is plenty of potential for Mozambique to develop a financial services and capital markets sector. “We are pretty optimistic in terms of growth,” he says.
He points to the prospect of telephone-based banking. This has proved particularly popular further up the east coast of Africa in Kenya and could revolutionise business in Mozambique.
“That hasn’t really taken off in Mozambique yet, but there’s no reason why it shouldn’t and given the country’s low population density, it’s an even riper candidate than Kenya,” says Mr Raleigh.
“There is also hope that things such as tourism, agriculture and ancillary services will grow given the low levels of banking among individuals and small companies. I would say there is fairly broad-based growth in financial services,” he adds.
Ultimately that growth will involve some rebalancing away from investments in infrastructure and industrial mega-projects. These create income but not the jobs needed to underpin a successful domestic financial sector.
Most pundits concur that Mozambique has made tremendous strides in building economic stability, attracting foreign investment and benefiting from substantial donor support since a 25-year civil war ended in 1992. The challenge now is to translate that economic achievement into a deepening and strengthening of the financial sector and capital markets.
