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AfricaJune 1 2017

Mozambique looks to gas reserves in aid recovery from 2016 blip

Mozambique is slowly advancing towards financial stability following a period of scandal and currency depreciation. Now it must find the money, and the partners, to help it exploit its abundant gas reserves, writes Peter Wise.
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Mozambique suffered a blow to its international reputation in 2016 after the disclosure of hidden public debts equivalent to 10% of national output. The damaging revelation followed close on the heels of the country’s ‘tuna bond’ scandal, in which the bulk of $850m in state-backed loans contracted to finance a fishing fleet were instead used to buy navy patrol vessels.

The ensuing debt crisis dented the image of a country that had been seen as one of Africa’s star performers. But it has also acted as a wake-up call for the government and financial authorities who have moved to limit damage to the economy and repair relations with donors and investors.

“Some very tough but essential fiscal and monetary measures have been put in place,” says Sérgio Magalhães, chief executive of local lender BiG Mozambique, a subsidiary of Portugal’s Banco de Investimento Global. “This has helped reassure international investors that the problems are being dealt with and that the country is back on the right path to building a more resilient and more sophisticated economy.”

Taking action

In the second half of 2016, the Mozambique government responded to growing public debt and an economic downturn by revising its 2016 budget, lowering revenue projections and rethinking its spending programme. In October, it also initiated talks with private creditors on debt restructuring in what the World Bank described as a “significant move” towards adjusting to “new realties” and tackling the country's debt burden. At the same time, the central bank tightened monetary policy, lifting reference lending rates and increasing minimum reserve requirements.

“The main short-term challenge for the Mozambican authorities is to restore macro-economic stability following the impact of the revelation of hidden debts on external debt levels, [and to promote] capital inflows and economic activity,” says Pedro Ferreira Neto, chief executive of Eaglestone, a sub-Saharan Africa-focused financial services group. “If the government can normalise relations with the International Monetary Fund [IMF] and other donors this year, it should lead to the resumption of international aid inflows that will help stabilise the local economy and support development projects.”

Following the hidden debts disclosure, the IMF and other donors suspended aid programmes, multi-billion-dollar gas projects were delayed and the metical, the Mozambican currency, fell sharply against the dollar. The government agreed to an independent audit of the loans involved in the hope of sealing a new deal with its donors. The audit results are expected to be published shortly. In January, the country failed to pay a $60m sovereign bond coupon due to a lack of financial capacity.

A delicate time

Mozambique was already navigating an economic downturn caused by low commodity prices and a regional drought when the undisclosed debts were revealed. Gross domestic product (GDP) growth fell to 3.3% in 2016, down from 6.6% in 2015 and an average of 7.3% in the previous decade, as foreign investment fell by 20% in 2016 and lower exports, public sector consolidation and tighter monetary policy held back growth. The metical depreciated by 36% against the dollar in 2016, accelerating the pace of inflation, which averaged 20%, with food price inflation reaching 32%.

The rate of currency depreciation, however, began to slow in October. António Correia, chief executive of Maputo-based Banco Único, says this was largely due to the central bank taking the right measures at the right time. “It succeeded not just in halting depreciation but in lifting the value of the metical, and this has had a positive impact on inflation,” he says. “Inflation is still very high, but the trend is downward.”

Bankers expect only a moderate recovery in 2017 after economic growth fell to a 15-year low in 2016. Even at its nadir, Mozambique’s growth rate was more than double the 1.4% average for sub-Saharan Africa and there are promising signs of a return to robust growth. “The potential for medium-term growth is strong,” says José Reino da Costa, chief executive of local bank Millennium BIM. “Despite recent adverse events, the financial sector has shown the necessary resilience and stability to continue supporting the economy.”

Positive signals include currency appreciation and falling inflation. “Foreign reserves at the central bank have recently increased to more comfortable levels and the metical has already appreciated nearly 10% against the dollar and 6% against the South African rand this year,” says Eaglestone head of research Tiago Dionísio. “This should help to gradually rebalance the foreign exchange market and ease inflationary pressures.”

Into the headwinds

The economy is forecast to expand by about 4.5% this year and 5.5% in 2018, according to the IMF. This reflects what Mr Dinísio describes as “continuing headwinds” arising from the need for fiscal austerity, foreign exchange shortages and high inflation. Annual growth is expected to rise to 6% or higher from 2019 onwards on the back of projected investments in the natural gas sector. The World Bank says half of all output will be generated by natural gas by the mid-2020s, projecting that average GDP growth rates could reach as high as 24% between 2021 and 2025. This positive outlook is lifting hopes for the restoration of international confidence in Mozambique and an upward trend in foreign investment.

“Investors are looking beyond the problems that emerged last year and anticipating the positive effects of the measures that have been put in place to deal with them,” says Mr Magalhães at Banco BiG. “Macro numbers such as [economic] growth and inflation are already improving. The action taken by the government and the central bank has given comfort to international investors that the country is gradually returning to the right track.”

Another positive sign was the announcement in May of an indefinite ceasefire by Renamo, Mozambique’s opposition party and rebel group. Renamo and Frelimo, the country's ruling party, fought on opposite sides in the 1976-1992 civil war that followed independence from Portugal. Violence has flared sporadically since Renamo challenged the results of the country’s 2014 elections. The opposition group had been renewing a ceasefire agreement every 60 days during peace talks, but in May it announced “a ceasefire without a deadline”.

Gas expectations

In a country whose natural resources remain largely unexploited, expectations for economic recovery rest to a considerable extent on the natural gas sector, with attention focused on the vast reserves of the Rovuma Basin off the country’s northern coast. Investment decisions on a number of multi-billion-dollar megaprojects are in the pipeline. “With the start of coal mining operations in Tete in central Mozambique and the upcoming expansion of gas production, the natural resources sector is set to boom in the next decade,” says Eaglestone’s Mr Ferreira Neto.

In March, ExxonMobil agreed to pay Italian energy company Eni $2.8bn for a 25% stake in its Mozambique gas operations. Under the agreement, the US giant will help Eni develop the infrastructure needed to bring some of the world’s largest untapped natural gas resources to market. The deal involves the so-called Area 4 deepwater block controlled by Eni and includes the Coral South liquefied natural gas (LNG) project, which is among the largest of its kind awaiting development anywhere in the world. “This deal offers Mozambique the chance to transform itself from one of the world’s poorest countries into a global LNG exporter,” says Mr Reino da Costa. Independent US company Anadarko operates Area 1, the second of Mozambique’s two primary concession areas.

To bring about more deals on the scale of the ExxonMobil-Eni agreement, Mr Magalhães says: “Mozambique needs to find a way to kick-start the process that leads to big oil and gas operators making final investment decisions on megaprojects, because there’s a time to market for international investors and an opportunity cost that is real and quantifiable.”

Total government revenue from such projects could exceed $115bn over the next two decades, according to estimates by the International Energy Agency. This is more than 10 times the country’s current annual GDP. But Mr Correia of Banco Único warns that the path to energy-driven prosperity is fraught with risks. “The energy sector can contribute greatly to Mozambique’s success, but it will be a complex process,” he says. “Competition with other countries whose infrastructure building is further advanced, renegotiating deals with multi-national companies, structuring finance and defining the assessment criteria for selecting local companies to support big energy projects are among the challenges that need to be met.”

The goal that Mozambique is working towards extends beyond a thriving natural gas sector. Mr Magalhães sees energy and mining as the potential basis for “a new economic and social cycle” and “inter-generational nation-building”. The challenge, the country’s bankers say, is to ensure that the imminent energy boom is both sustainable and inclusive, with revenues being channelled into other sectors and vehicles for safeguarding wealth over the long term.

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