January/2014. Growth. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized HIGHLIGHTS: MOZAMBIQUE ECONOMIC UPDATE January/1 's economy registered strong growth of 8.1 percent p.a. in the third quarter of 13 The National Assembly approved the 1 State Budget with a large increase in public spending. The 1 State Budget also includes a large increase in defense spending as a result of incorporating off-budget public expenditures by EMATUM, a public tuna fishing company Growth in credit to the private sector has picked pace as the Bank of lowers policy rates to a record low of 8.5 percent While the Metical remained stable against the USD, it has appreciated slightly against the South African Rand while depreciating against the Euro. s economy grew by 8.1 percent p.a. in the third quarter of 13 Growth The economy grew by 8.1 percent in the third quarter of 13 (y-o-y). Cumulative GDP over the three quarters grew by 7 percent y-o-y. Growth in the third quarter was driven by the tertiary sector (especially transport and communications), which grew by 8.8 percent. This was followed by the primary sector, which registered growth of 7 percent (driven by extractive industries). Quarterly Real GDP Growth, y-o-y (percent) I II III IV I II III IV I II III Source: INE A breakdown of GDP growth by sector reveals that extractive industries continues to be the fastest growing sector (at 1. percent) followed by transport and communications (18. percent). After weak growth in the past few quarters, electricity and water recovered and grew by 11.5 percent. Financial services continue to be one of the fastest growing sectors in the economy (1.3 percent). Real GDP Growth in 3 rd quarter of 13 by sector (percent y-o-y) 3 rd quarter 1 3 rd quarter 13 Agriculture Fishery Extractive industries.5 1. Manufacturing industry Electricity and water Construction Trade and services Hotels and Restaurants.3. Transport and communications Financial services Real estate and services to businesses Public administration Other services.. Total GDP Growth Source: INE 1/6

2 Sep-1 Nov-1 Mar-13 May-13 Sep-13 Nov-13 Preliminary current account data show a deficit significantly lower than previous quarters in 13 External sector Current Account Balance (USD million) I II III IV I II III IV I II III Merchandise Trade Balance (USD million) I II III IV I II III IV I II III International reserves increased to US$ 3. billion by end of 13 The execution rate of the 13 budget has improved compared to the same period in 1 Preliminary data show that the current account deficit in the third quarter of 13 has fallen to US$ 9 million, thanks to a lower trade deficit and significantly larger transfers (capital gains taxes). The cumulative trade deficit for the first three quarters has reached US$ 3.1 billion, compared to US$.5 billion during the same period in 1. This increase is partly explained by continuing imports from large-scale capital intensive projects in the extractive industries and infrastructure sectors. Current transfers increased significantly during the same period from US$ 68 million in 1 to US$ 1. billion in 13. These developments have helped reduce overall current account deficit over the three quarters from US$. billion in 1 to US$ 3.6 billion in 13. Cumulative FDI by the third quarter of 13 reached US$.5 billion, compared to US$ 3.7 billion over the same period in 1. The large current-account deficit does not represent a structural imbalance since it is primarily driven by large scale capital-intensive investments and is financed by FDI. After a decline during the first half of 13, international reserves are steadily rising. This trend can be attributed to capital gains taxes, disbursement of donor funds and FDI. These gains were however partly offset by fuel imports and payments by the state. Reserves represent 3 months of imports (including mega project imports). Fiscal Sector International Reserves (USD billion) Government revenue in the first three quarters of 13 reached MZN 88 billion, corresponding to a nominal increase of 6 percent over the same period last year and an execution rate of 73 percent. Tax collection was on target by end September 13 and according to the Tax Authority, tax collection surpassed the annual target to reach over MZN 1 billion by end December 13. Revenue was boosted by capital gains taxes related to gas investments. Total expenditure reached MZN 116 billion by end September 13 with an execution rate of 6 percent, an improvement of percentage points over last year. Low execution of capital expenditure is explained by delays caused by the floods and persistent problems in the execution of investment projects, particularly when financed from external sources. Financial operations have grown substantially, mainly due to an expansion in active operations with the start of implementation of large infrastructure projects. Deficit financing through external grants and loans has reached 9 percent and 5 percent of the annual allocation respectively. The Government of collected US$ million in taxes from capital gains in August 13. This collection has not been included in the 13 budget nor is it reported by the Government of as collected in the execution reports as would be standard practice, instead being included in the 1 budget as revenue. Reporting of collection of these taxes in 13 would improve the revenue and deficit figures in 13, while revenue projections in 1 would be lower, which would result in a larger deficit. 3 1 /6

3 State Budget Execution Rate for Year 13 Actual Budget Budget Executed (millions MZN) (million MZN) Execution Rate (Jan Sept) % Total Revenue 1,9 88,33 73 Tax Revenue 1,83 75,63 75 Other Revenue 19,66 1,669 6 Grants 3,3 1,3 9 Total Expenditures 193,89 116,58 6 Current Expenditure 1,53 68,16 68 Compensation of employees 5,79 37, 73 Goods and Services 19,537 13,8 68 Interest on Debt 5,6,86 51 Transfer payments 16,6 11,36 7 Subsidies 3,37 1,98 39 Other 5,5,33 6 Capital Expenditure 79,99 36,397 6 Domestically financed 3,619 18,736 5 Externally financed 5,373 17,66 39 Financial operations 13,36 1,11 91 Active 9,6 9,31 99 Passive 3,8,773 7 The National Assembly approves the 1 State Budget. Deficit, External financing 1,3 18,783 5 Domestic financing 3,573 1,853 5 Source: Ministério das Finanças The proposed budget for 1 was approved in December. Government revenues are projected at MZN 17 billion and expenditure at MZN 1 billion, a nominal increase of 7 percent. Goods and services, public investments and financial operations, which capture on lending of the government to SOEs for infrastructure investments, have grown the most. The budget was also increased during the parliamentary approval process by almost MZN 11 billion to incorporate investment expenditure by the Ministry of Defense that had been kept off-budget through the operations of the company EMATUM. This increase is also reflected in an increase in external financing to MZN 57 billion. A total of MZN 135 billion will be allocated to PARP priority sectors. State Budget for Year 1 Annual Budget 13 As a % (millions MZN) of GDP Annual Budget 1(million MZN) as a %of GDP Total Revenue 1,9 6 17,37 8 Tax Revenue 1,83 16,558 Other Revenue 19,66,81 Grants 3,3 5 3, 6 Total Expenditures 188,7,891 5 Current Expenditure 1, ,666 Compensation of employees 5, , Goods and Services 19,79 5,18 5 Interest on Debt 5,6 1 6,37 1 Transfer payments 16,6 3 18,78 3 Subsidies 3,37 1,671 1 Other 5,6 1 6,593 1 Capital Expenditure 79, ,77 19 Domestically financed 3,611 7,9 8 Externally financed 5, ,8 11 Financial operations 8,66,56 5 Active,5 1 17,767 3 Passive 3,8 1 6,689 1 Deficit, ,118 6 External financing 1,3 57,3 5 Domestic financing 3, ,715 1 Source: Ministério das Finanças 3/6

4 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Mar-13 May-13 Sep-13 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 The budget incorporates off-budget defense spending by the public tuna fishing company EMATUM The incorporation of off-budgetary public expenditure related to EMATUM operations in the 1 state budget was a request by the national assembly. In September 13 EMATUM, a government owned company, issued bonds with a government guarantee worth US$85 million. The bonds were reportedly to finance investments and operations in the tuna fishing industry, but a large share of the operation will finance coast guard and maritime security services that are not commercial in nature. These non-commercial activities, worth US$35 million, have now been incorporated into the 1 budget. The operation raised concerns with s development partners regarding fiscal transparency and prioritization of public spending. These concerns led a number of development partners to delay budget support disbursements in late 13. Inflation Inflation slows further to.96 percent p.a at the end of 13. After a slight acceleration during the first semester, inflation reached its peak in June 13 at 5. percent (y-o-y) and has since been declining, reaching.96 percent for the year in December. This slowdown in inflation is an outcome of various factors like a rise in agricultural production, the continued fall in the prices of food and the effect of the appreciation of the Metical against the South African Rand Inflation Rate, y-o-y (percent) Standing Lending Facility lowered further to boost credit to the economy Monetary Policy In a move to further increase credit in the economy, the Bank of lowered the Standing Lending Facility (SLF) to 8.5 percent. Credit to the economy seems to have picked up during the last year and by October 13 it was growing at almost 3 percent y-o-y. Interest rates charged by commercial banks have not declined at the same pace, suggesting limited transmission from policy to market rates. While a significant proportion of bank credit is destined to finance the activities of private enterprises, credit to households and state-owned enterprises has been gaining weight. Source: INE (IPC Maputo) Growing Credit to the Private Sector % 3% % 1% % Standing Lending Facility Growth in credit to private sector Exchange Rate The Metical remains relatively stable While the Metical remained stable against the US Dollar until the end of December, there has been a slight annual depreciation. This trend in part reflects the effects of the strengthening of the latter in international markets. There was an annual appreciation of the Metical against the South Africa Rand while on the other hand the Metical has depreciated against the Euro since July. Nominal Exchange Rates USD Euro ZAR /6

5 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-1 Apr-1 Jul-1 Oct-1 Apr-13 Oct-13 The real effective exchange rate has been stable since mid 11 The stability of the nominal exchange rate is also reflected in the real effective exchange rate, which has been fairly stable for the past 18 months and it was at the end of 13 slightly lower than at the end of 11. This stability follows a period of relative appreciation in late 1 and early 11. Strong FDI inflows and a projected increase in exports in the medium term may put upward pressure on the real effective exchange rate Economic News Real Effective Exchange Rate (Jan 1 = 1) Source: World Bank Staff Estimates IMF completes first review under the new Policy Support Instrument for Companies from Thailand & will build railway line and port Capital gains taxes could continue in 1 Government of publishes mining and petroleum contracts Japan to finance new Maputo Power Station The International Monetary Fund (IMF) completed the first review under the three-year Policy Support Instrument (PSI) for. The PSI-supported program is on track. The review highlights the strong macro-economic performance with moderate inflation. Outlook for the medium term remains favorable and growth is expected to be sustained by the natural resource boom and investment investments. Progress has also been positive but with some slippage in structural reforms. The review raised concerns about lack of transparency and prioritization of projects related to the issuance of bonds with a public guarantee by EMATUM. The contract to construct a 55 kilometer railway line between Moatize in Tete and Macuse in Zambezia, and develop the port terminal at Macuse has been awarded to a consortium of companies in Thailand (Italthai Engineering) and (consortium Codiza and SOE CFM). The estimated cost of the projects stand at US$ 3.5 billion. The railway would help to transport mineral coal extracted in Moatize. The railway line at Sena is also being expanded, which should expand capacity to transport coal from Tete from the current 6.5 million to million tones. Completion is expected by the end of 15. American oil and gas company Anadarko is selling 1 percent of its holding in the Rovuma Basin to the Indian state-owned Oil and Natural Gas Corporation (ONGC) Videsh Ltd. for US$.6 billion, which could result in further capital gains taxes for the Government in 1. Other operations seem to be under preparation to further consolidate ownership structures in the Rovuma basin, which could generate further capital gains taxes. The Government of, through the Ministry of Mineral Resources (MIREM), has published details of several concession contracts for exploration in the petroleum and mining sectors. This is part of the commitment of the Government to increase transparency in the natural resources sector. The Government has released contracts in the petroleum (with Anadarko Petroleum Corporation, Petronas and Eni in the Rovuma basin, with Sofala Offshore Limited for the Sofala Block and with Sasol for the Pande and Temane fields and Block A on land in the south) and mining sectors (with Kenmare Resources for the exploitation of heavy sands in Moma). Other contracts may be made public in the future. The Japanese government is to grant a loan of US$ 167 million to build a gas fired power station in Maputo. The station will generate 1 megawatts, about a third of Maputo's current electricity consumption. Work on the new station should be complete by 18. Available projections show that the demand for electricity in southern will continue to grow at an annual average rate of 18 per cent for the next five years. 's public electricity company, EDM, expects considerable improvement in electricity supply resulting from the new power station. 5/6

6 Violent clashes between armed members of RENAMO and the Government security forces continue will conduct general elections end of 1 Since mid-13 there has been renewed conflict between armed members of the opposition group RENAMO and security forces from the Government of which has resulted in violent clashes. Violent clashes were initially limited to a small geographical area in Sofala.. According to some media reports there have now been clashes in the provinces of Nampula and Inhambane and armed members of RENAMO have more recently been seen in Tete. While it is difficult to assess the impact that these clashes may have on the country s economy, a number of analysts, including from the country s largest private sector association, CTA, have warned that a prolonged low-level conflict or an escalation of the conflict could negatively affect the country s prospects and foreign investments in s extractive industries. In October 1, will conduct its 5 th general elections (since the end of the civil war in 199), which will elect the country s next president. The constitutional -terms limit for the country s president means that President Guebuza will not run again for the election. The Political Commission of Frelimo party (the party that has governed since independence), has proposed three (shortlisted) candidates to Frelimo s Central Committee. The Central Committee, which is to meet at the end of February, will choose Frelimo s candidate to run for president in the general elections. The three (shortlisted) candidates proposed by the Political Commission are Alberto Vaquina, the current Prime Minister, Jose Pacheco, Minister of Agriculture, and Filipe Nyussi, Minister of Defense. Economic Prospects Global growth is expected to accelerate in 1. Prices for key commodities for will remain similar to 13, but well below prices in recent years Commodity price forecast (5=1) e 1f 15f 16f Energy Agriculture Metals and minerals Fertilizers Source: World Bank GEP Growth prospects of s main trading partners 1 Source: World Bank GEP The January 1 Global Economic Prospects report expects acceleration in global growth from. percent in 13 to 3. percent in 1 thanks to the rebound in high-income economies. Economic growth in is projected by this report at 8.5 percent in 1 up from 7 percent in 13, driven by investments in the natural resources sector as well as increased production from these projects. The GEP projects price stability for commodities that are key for (energy, minerals and metals), with prices well below prices in 1, a result of dampened demand from China coupled with robust supply of metals in the international market. With rising supply from the US, there is a risk of downward pressure on energy prices (in particular gas). The Mozambican government's Economic and Social Plan for 1 has set a target for economic growth of eight percent with a rise in nominal GDP from an expected US$ 15. billion in 13 to slightly more than US$ 17 billion this year, and that of GDP per capita from US$ 631 to US$ 68 (based on the population projections from the 7 census). The Plan also projects an average inflation rate of no more than 5.6 percent. Exports for the year are projected at US$.8 billion up from US$ 3.7 billion in e 1f 15f 16f China Euro Area India Malawi South Africa Zimbabwe 6/6