Beyond the bad news: Mozambique maintains investment pull

For foreign investors looking to enter Mozambique, recent headlines coming out of the country have been worrying. Cooling commodity prices have hit growth prospects hard and caused a massive devaluation of the metical, which was Africa’s worst performing currency in 2015. Pressure on government finances has grown in tandem, as diminished revenues have squeezed Mozambique’s fiscal position and left question marks over the country’s ability to service its debt.

“Mozambique is a small economy and one that is relatively dependent on the export of raw commodities. So any slowdown in the regional or global economy will have a big impact on local conditions,” says Antonio Correia, chief executive of Banco Único.

Fishy business

These difficulties have been compounded by ongoing challenges related to Mozambique’s so-called ‘tuna bond’, intended to develop a state tuna fishing fleet but largely channelled to fund the purchase of naval patrol vessels. In addition, the government’s revelation to the International Monetary Fund (IMF) that it failed to disclose about $1.4bn of public sector external debt (equivalent to about 9% of gross domestic product [GDP]) has seen a number of key donors, including the UK, the US and the World Bank, suspend much-needed disbursements to the government.

“In late June, the Mozambican authorities admitted to the IMF that the situation of the country requires an urgent implementation of decisive measures to avoid the deterioration [of the economy],” says José Reino da Costa, vice-chairman of the board of directors at Millennium bin, Mozambique’s largest bank.

But the perceptions of Mozambique abroad mask an altogether different reality in the country. In the capital, Maputo, the mood among private sector leaders remains buoyant, even if most recognise that the current outlook is far from favourable. Seasoned players in banking and business point to the relative youth of the country’s economy, while most have grown accustomed to the ups and downs of a fast-growing but volatile economic trajectory.

“Mozambique is not a country on the verge of collapse. The headlines being generated outside of the country are more alarmist than the reality on the ground,” says Sergio Magalhães, the executive director of BiG Mozambique, the local subsidiary of Portugal’s Banco de Investmento Global.

Indeed, some banks and businesses are looking at the current downturn as an opportunity to acquire assets on the cheap. Particularly for newer entrants to the banking space, with good liquidity positions and a lack of bad legacy assets, the current cycle is seen as a good chance to stake key positions in the market before the inevitable upswing follows.

“The challenge facing Mozambique’s private sector is that it needs to communicate this reality to key investors and decision makers in London, Johannesburg and Lisbon,” says Mr Magalhães.

Persuading investors

But before any material change in the economy can occur, there is a widespread feeling that the government must take meaningful steps to address a lack of transparency in the public finances. This will be required to restore investor confidence, as well as key relationships with bilateral donors such as the IMF, the UK and the US, which provide substantial budgetary support.

“The suspension of the support from the IMF to the state budget had a natural influence on the retraction of investors. This has led to a major reduction on the foreign direct investment. However, it is still expected that economic growth will remain sustainable for the current year,” says Mr Reino da Costa.

The country’s immediate troubles began under the last administration when a state-owned company, Empresa de Mocambicana de Atum (Ematum), issued an $850m bond to finance a tuna fishing fleet. Instead, about $500m of this sum was used to buy naval patrol vessels. A little over two years later, the bond has been restructured after Ematum failed to generate sufficient revenues.

Naval necessity

Though the restructured transaction was accepted by more than 80% of bondholders, it was characterised as a ‘selective default’ by rating agency Standard & Poor’s, while the tuna fishing enterprise has all but collapsed. But speaking to The Banker, private sector figures in Maputo point to the fact that Mozambique has discovered one of the world’s largest offshore gas fields but has no naval vessels to provide any form of maritime oversight or security.

However, procuring defence equipment on a budget that is supported by international donors is politically sensitive, so while purchasing the equipment through a government-backed ‘tuna bond’ was deemed to be ill advised, businesses in the country are at least sympathetic to the government’s motives.

This transaction, as well as further undisclosed loans taken by the government and secured around the same time, has contributed to growing public sector debt, which stood at about 85% of GDP by the end of 2015. Most of this – about $9.89bn – is denominated in foreign currencies, with the highest proportion allocated in dollars. As the metical has plunged, servicing this debt has become increasingly difficult.

The authorities’ response to these problems has been to initiate several cost-cutting measures, as well as to promote greater transparency of public finances.

Dr Tomas Matola, chief executive of Banco Nacional de Investimento (BNI), Mozambique’s national development bank, says: “The government of Mozambique has designed an austerity plan that consists of cutting the current and unproductive expenditure and creating a financial risks analysis unit, which will be responsible for tracking the government indebtedness, as well as its potential impacts.”

Gas boost in pipeline

By most economic indicators, Mozambique’s outlook is deteriorating. Substantial government debt is accompanied by sky-high inflation – at 19% in June – and projected GDP growth of 4.5% in 2016, three percentage points below historical levels according to the IMF. But the discovery of an estimated 5000 billion cubic metres of natural gas off the country’s north coast, in the Romuva basin, looks set to give the economy a boost to dwarf any of these current difficulties.

Italy’s Eni and US independent Andarko have both started to develop concessions offshore. The International Energy Agency estimates that total government revenue up to 2040 could reach north of $115bn from these projects. More offshore reserves are still to be discovered and exploited, meaning this figure could rise in the coming years.

Beyond gas, the government is looking to other opportunities in power generation and agriculture, to position the country as a hub for the southern African region. With Zimbabwe’s status as a major food producer diminished, Mozambique is well placed to capitalise on its agricultural potential to fill the void.

“The economic potential here is across all sectors and not just in natural resources. Moving forward, agriculture will be important, given that Mozambique’s population is growing so quickly, as are the populations of many of its neighbours,” says Mr Correia.

Generating potential

Meanwhile, the country’s abundant hydropower potential, combined with its natural gas reserves, is offering the government a chance to make Mozambique the region’s dominant power generation hub. Among its neighbours, South Africa is grappling with a power generation crisis just as many other fast-growing economies in the Southern African Development Community are struggling to meet their energy needs.

“We want to develop Mozambique’s hydropower potential, which is about 18 gigawatts, as well as the country’s abundant coal and gas reserves, to supply the domestic market and our neighbours with power,” says Lourenco Sambo, director-general of Mozambique’s investment promotion centre.

Taken together, these opportunities and others underscore the optimism that prevails in Maputo. For the banking sector, the gains are expected to be substantial. Those lenders focused on infrastructure finance, in particular, can expect to benefit. In the case of BNI, its focus on infrastructure development means that its role in the market is expected grow along with its returns.

“BNI expects to reach $23m of profit in 2025, and become a true giant in the Mozambican market in the next 10 years,” says Mr Matola.

Though foreign direct investment has stalled over the past year, the opportunities on offer mean it is only a matter of time before investors return. How long that process will take largely depends on the government’s efforts to augment transparency, clean up the public finances and enact the investor-friendly reforms needed to propel the economy forward.

“Today, Mozambique represents an investment opportunity the likes of which the world has not seen for many years,” says Mr Magalhães.