Importance of trade with China exposes Mozambique to impact of Covid-19

13 March 2020

China has risen to become one of Mozambique´s most important trade partners. With the threat of the global economic impact the Covid-19 pandemic growing, The Bank of Mozambique (BdM) conducted an assessment of its potential damages to the country´s economy, and the prospects are worrisome.

In its latest Economic and Inflation Outlook, BdM says “risks and uncertainties” have increased and identifies Covid-19 as one of the threats to the economy, along with the intensification of military instability in the north and the impact of floods and droughts. The prolonging of Covid-19, BdM says, “could result in a slowdown in the global economy and consequent weak external demand, with an impact on the dynamics of domestic prices”.

Already, global demand has declined due to reduced consumption in China, with the extension of the Lunar New Year holidays associated with the Covid-19 outbreak. In February 2020, the price of natural gas and aluminum fell by 30.0% and 9.1% year-on-year, respectively. Better for Mozambique’s terms of trade was, in the same period, a drop of 14.0% in the price of oil, of which the country is dependent.

The increase in the price of sugar (14.6%), in annual terms, had positive effects in terms of trade, as it is an export product, while the increase in import prices of products, such as rice (33,4%) and corn (0.8%), had negative effects.

In its assessment of the Covid-19 impact, BdM predicts that a prolonging of its impact in the medium term, “aggravated by a possible spread to other regions of the globe”, could lead “to an economic recession in China, with possible stagnation in global economic activity, with China’s main trading partners being the most affected”.

For the Mozambican economy, according to BdM, the impact is both potentially direct and indirect.

“The fact that Mozambique has a relative exposure to trade with China stands out” in terms of direct impacts. China is currently responsible for 9.1% of the country’s total trade volume, being the destination for around 5.8% of Mozambican raw material exports and the source of 11.8% of imports of inputs and products various manufactured products.

Main exports include minerals (graphite, stones, garnet, granite, sandstones, titanium, niobium, tantalum, vanadium or zirconium ores); raw and semi-processed wood (sawn); fishery products (crustaceans); cotton; nuts, oilseeds and other seeds; and plastic waste.

In terms of imports, the biggest components are food products, including rice, flour, sugar, vegetables and fish; construction material (cement, iron, aluminum, glass, paints and varnishes); furniture and electronic devices; clothing and cosmetics, including fabrics and their derivatives; machines, passenger cars, tractors and electronic devices; medicines, insecticides, rodenticides and fungicides; paper and other office supplies; and tires and accessories for vehicles and machines.

“With the prolongation of the virus, there may be less internal availability of products from China, especially construction materials and different machinery, which could compromise the dynamics of some sectors of economic activity (construction and agriculture)”, BdM says. Additionally, it adds, there is the possibility of reducing of volume of exports to China, “which would result in the worsening of the current account deficit”.

Indirectly, “Mozambique may suffer from falling prices and demand for commodities in the international market”. Recent Balance of Payments data (2019) suggest that major projects (including thermal coal and aluminum exporters) account for 69.49% of the country’s global exports.

“Thus, a slowdown in global demand will compromise not only the productive activity of these projects, but also their ability to make foreign currency available in the national market, transmitting the effects to the exchange rate”, BdM says.

In terms of inflation, part of the products that make up the Consumer Price Index (CPI) in Mozambique come from China, and impact is expected “with the restriction in their supply”.

Less availability of goods imported from China, the BdM says, may contribute to a rise in domestic prices and inflationary pressures due to higher prices for import products and the effect of the exchange rate, in a scenario of scarcity of foreign exchange, due to lower export earnings.

But, for the time being, BdM expects inflation to remain at one-digit in 2020. Additionally, it forecasts a recovery of economic activity in 2020 “sustained by the implementation of investments in gas exploration, materialization of post cyclone reconstruction projects and improving investor confidence in the face of liquidation of part of the State’s debt with suppliers of goods and services”. (CLBrief/Macauhub)