Growth of the Mozambican economy faces new uncertainties

9 March 2020

The scenario for the acceleration of growth in the economy of Mozambique in 2020 now faces greater uncertainty due to the global economic slowdown, due to the Covid-19 epidemic, according to Mozambican bank Moza Banco.

The bank’s Economic Bulletin, published in February, said that Mozambican Economic activity should accelerate in 2020, but “should still remain below its potential.”

The acceleration, it said, is based on investments in the oil and gas sector, alongside others connected to the reconstruction of infrastructure destroyed by natural disasters, and even to the “effects of expansionary monetary policy adopted in 2019.”

“We expect more accelerated growth of credit to the private sector, a general increase in foreign direct investment and subsequent substantial increase on the levels of inflation,” said the Moza Banco bulletin.

“The fact that the Mozambican state is financing itself increasingly on the domestic market, mainly through the issuance of treasury bills and bonds in ‘repo’ (repurchase agreement) operations, may also lead to pressure to increase the level of current market interest rates,” it added.

The International Monetary Fund (IMF) predicts Mozambican economic growth to accelerate to 6.04% in 2020, compared to 1.8% last year, with an increase in private consumption, investment and exports.

The document from Moza Banco adds that the authorities should make provisions for the economic contagion effect of Covid-19, because Mozambique “shows major vulnerabilities in the health sector and also on a technological and logistical support level in containing this epidemic,” in addition to being exposed “via indirect routes.”

“South Africa is China’s main trading partner in Africa. Trade between the two countries represents approximately 20% of the aggregate amount of South Africa’s total export and import activities. Reduced export earnings due to the drop in Chinese demand could exacerbate the country’s economic outlook, with possible impacts also in Mozambique,” Moza Banco said.

The IMF, the World Bank and the Bank of Mozambique currently remain in line with projections of Mozambique’s inflation remaining low and stable in 2020.

However, Moza Banco mentioned that inflation projections, “maybe revised upwards due to continued military clashes in some parts of the country, risks to agricultural production due to the occurrence of unfavourable climate events, likely depreciation of the metical and possible reduction in the supply of products imported from China (due to the effect of the coronavirus).”

The depreciation of the metical is linked to the effect of increased imports of goods and services related to oil and gas projects and projects for reconstruction after natural disasters.

According to Moza Banco, there was a sharp depreciation of the metical against the dollar in January (3.9%), “attributed mainly to a correction of the improvement of the exchange rate as seen the previous month.”

The reference rates of the monetary market, said the report, remain unchanged for the fourth consecutive month according to the Bank of Mozambique, the prospects for the short term point to an acceleration of annual inflation in the first quarter, without affecting the price stability targets.

“For this reason, we anticipate that the Bank of Mozambique will tend to contain the relaxation of monetary policy throughout 2020,” said Moza Banco. (macauhub)