Mozambique. Summary. Moody s Caa3 / S&P SD / Fitch RD 1. Economic Indicators

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1 Mozambique Summary Moody s Caa3 / S&P SD / Fitch RD 1 Economy: Agriculture 25%, Industry 21%, Services 54% Mozambique is rich in natural resources, such as gas and coal. Large mining and energy projects resulted in growth rates averaging 7.3% from However, in 2016 the revelation of US$1.4 billion in undisclosed loans led to a fiscal and debt crisis that prompted the government to seek to renegotiate terms with bondholders. Thus far, little progress has been made in the restructuring process. Despite these troubles, important gas projects continue to move forward such as the one led by ENI-Exxon, with production expected to begin in These megaprojects have led to a surge in imports and a high current account deficit financed by FDI and loans related to the projects. Key challenges for Mozambique, which has one of the lowest GDP per capita ratios in the world, include a lack of diversification and poor infrastructure. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of Imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Haver Analytics, IMF 607

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB- BB- B+ B+ B B- CCC+ CCC CCC- B B- CCC+ CCC CC CCC- C CC Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Mozambique 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 608

3 Mozambique Strengths Economic Growth Mozambique had been among the most dynamic economies in the world since the end of its 15-year civil war in The government adopted market-friendly policies to take advantage of the country s vast natural resources. The left-wing government abandoned the state-led economic model and moved toward an open market economy. In the ten years from , the economy grew by an average of 7.3%, placing Mozambique among the fastest-growing economies in the world. 2 However, in 2016 the revelation of US$1.4 billion in undisclosed loans led to a fiscal and debt crisis that prompted the government to seek to renegotiate terms with bondholders. Growth slowed to 3.8%, but recovered to 4.7% in 2017 and is expected to average 6.2% from and increase to nearly 14% in when production from a significant gas project is expected to begin. Natural Resources and Foreign Investment Mozambique, like most sub-saharan African countries, is rich in natural resources, especially minerals and energy. It was not until very recently that coal and gas megaprojects started developing these resources. Mozambique is estimated to have the second-largest coal reserves in Africa, totaling 32 billion tons, and according to the IMF, Mozambique could become one of the largest producers of coal in the world, in particular in the Tete province and Zambezi area, where Vale and Rio Tinto are operating. Coal production is expected to total 41.8 million metric tons per annum (mtpa) by 2017, up from 6.3 mtpa in Most of this will be exported to China and India; 4 however, this potential has not fully been explored due to both external factors, such as the fall in demand as China s growth slows and declining prices as a consequence of the commodity shock in , and companies becoming more cautious and deciding to slow expansion plans. Mozambique also completed the Nacala Corridor in 2017, improving its previously poor infrastructure that limited ongoing coal exploration and production. The potential in the energy sector is also significant as the private sector is making large investments that will allow Mozambique to become a significant gas producer in about a decade. Mozambique s total recoverable resources are estimated at more than 100 trillion cubic feet, among the 10 largest in the world. Large liquefied natural gas (LNG) projects are currently underway, with the ENI-Exxon consortium securing US$4.7 billion in financing to develop the Coral South project with production expected to begin by Additionally, Anadarko Petroleum has plans to invest US$15 billion in Mozambique, although the final investment decision has not been made. 6 Political Stability Mozambique has a relatively stable political environment despite tensions between the ruling party, Frelimo, and the opposition party, Renamo. The country has been ruled by Frelimo since independence and has had only four presidents: Joaquim Chissano from 1975 to 1986; Joaquim Alberto Chissano from 1986 to 2005; Armando Emilio Guebuza from 2005 to 2014; and the current president Felipe Nyusi, who won by a comfortable margin in the October 2014 election. The results were contested by the opposition, although this issue, which created fears of returning to civil war, ultimately came to a peaceful resolution. 7 Despite sporadic bouts of violence, Frelimo and Renamo have maintained communications to overcome disagreements on a range of issues. 8 We expect Frelimo to maintain tight economic and political control of the country. Felipe Nuysi was re-elected in October 2017 as president, and he has indicated that he will run for re-election again in

4 Lazard Emerging Markets Debt Weaknesses Lack of Transparency and Credibility In April 2016, the government of Mozambique announced the existence of US$1.4 billion of previously undisclosed loans, amounting to 10% of GDP. These loans include obligations undertaken by state-owned enterprise Pro-Indicus of US$633 million; Mozambique Asset Management Company of US$535 million, borrowed in 2013 and 2014; and bilateral loans of US$221 million. 10 This revelation led the international donor community, on which Mozambique relies heavily, to suspend further budget support, and the IMF also suspended financial assistance. As a pre-condition to a new program, the IMF requested an independent audit of Pro-Indicus, Mozambique Asset Management, and Ematum, the state-owned fishing company. The results of the audit released in June 2017 showed that there was still at least US$500 million in unaccounted expenditures, 11 leading the IMF to conclude that an information gap 12 precludes it from restoring a program. 13 In November 2017 Mozambique indicated that its needed an IMF program. 14 The IMF visited Mozambique in December to discuss Article IV consultation, the economy and the external debts that led to the suspension of the IMF program. 15 Debt Crisis and Bond Renegotiation The revelation of hidden loans has triggered a debt crisis. Mozambique started with a high debt level of 88% of GDP as of the end of 2015; hidden debt of US$1.4 billion (10% of 2015 GDP) bringing debt levels to around 100% of GDP that further increased to 113% GDP by 2016 due to foreign currency (FX) depreciation, with the government of Mozambique indicating that debt could reach 130% of GDP 16 and that the country is in debt distress, breaching all thresholds of debt sustainability. As a result, the government indicated in 2016 that it intended to negotiate the terms of the controversial Ematum bonds, which were issued in April 2016 after the government offered a swap to bondholders. 17 A bondholder committee was formed, 18 but negotiations have made little progress as of December Weak Public Finances with Contingent Liabilities The combination of a sudden withdrawal of IMF and international donor community financing prompted the government to make substantial cuts in public expenditures at a time when government revenues were declining. As a result, the fiscal deficit is expected to increase to 7% in Mozambique has limited capacity for additional fiscal adjustments and further downside risks stem from: (i) continued depreciation of the currency, as most debt is external; (ii) the weak financial position of a number state-owned entities across a number of industries, including the electric, energy, airline, and telecom sectors; (iii) further delays in implementing fuel subsidy reforms; and (iv) weakness in the domestic banking sector that may require government intervention. 19 External Sector Mozambique s external imbalances are larger than its fiscal imbalances. Mozambique has historically had a high current account deficit in the 40% of GDP range, reflecting competitiveness and structural problems. Like most African countries, Mozambique imports most of the products it consumes, and the country s savings rate is relatively low. The IMF forecasts that the current account deficit will reach 114% of GDP by 2022 and average 90% in the period , 20 reflecting the large import needs to develop LNG projects, although most of the financing of the current account deficit will be from FDI. 610

5 Mozambique Limited Infrastructure One of the main growth constraints is Mozambique s poor infrastructure, especially roads, railroads, and ports. Most of the important megaprojects are in the northern part of the country, where there is essentially no infrastructure. This means that foreign companies developing the megaprojects are also investing large sums in infrastructure, including railways. For instance, Mozambique s current rail capacity can move only 6 million mpta of coal, compared to the expected 41.8 million mpta expected to be produced by 2017, creating a major bottleneck in economic growth. The all-important Nacala corridor finally became operational in 2017 and will increase transportation capacity in Extensive Poverty Despite its economic success, Mozambique is one of the poorest countries in the world. GDP per capita before the debt crisis was US$626, among the lowest of emerging markets countries Lazard follows. 22 After the economic crisis and the contraction in nominal GDP, GDP per capita is now even lower at US$ Social indicators are also among the worst in the world, and on the 2016 Human Development Index, Mozambique ranks 181 th out of 188 countries. 24 This is a major concern, as it could result in political instability. It also represents a major source of pressure on the fiscal accounts given the high demand for social spending, part of the reason the government will have a difficult time reducing the fiscal deficit. Economic Base The economy is not very diversified, as agriculture represents about one-third of GDP and employs over half the population. Most agricultural production is used for personal consumption. Thus, like other African countries, Mozambique is vulnerable to weather conditions, and it experienced a drought in The expected recurrence of El Niño, which in the case of Mozambique results in drought during the rainy season of January to March, poses a risk to the country s crops and may destabilize the food supply. 25 The government is aware of the need to diversify and is working on a plan for a new Industrial Development Strategy 26 while taking steps to improve the ease of doing business, which currently ranks 138 th out of 190 in the 2016 Doing Business Index. 27 Risk of Civil War Tension between the ruling Frelimo party and the opposition party, Renamo, decreased after a new peace agreement was signed in mid-august This ended a two-year conflict after sporadic fighting between Renamo and the army. 29 Both Frelimo and Renamo fought during the civil war from 1976 to 1992, when a peace agreement was signed. Since then, the influence and popularity of Renamo has declined substantially. The risk of a new civil war is generally considered minimal as people want to avoid another civil war. Additionally, Renamo does not have international support. Renamo has shifted its agenda toward autonomy in six mineral rich provinces: Manica, Nampula, Niassa, Sofala, Tete, and Zambezia. 30 The latest incidents of targeted killings and abductions among the major parties are unlikely to result in an escalation on the same scale as experienced in

6 Lazard Emerging Markets Debt Country Background Size 799,380 KM 2 (35th) Capital Maputo Population 26.6 Million Religion Roman Catholic 28.4%, Muslim 17.9%, Protestant 12.2%, Other 41.5% Median Age 17.2 Years Literacy Rate 58.8% Political System Presidential Republic Government Leadership President Filipe Jacinto Nyusi; Prime Minister Carlos Agostinho Do Rosario Next Election 2019 Legislative Branch Unicameral Assembly Economy Agriculture 24.8%, Industry 21.5%, Services 53.6% Labor Force Agriculture 81.0%, Industry 6.0%, Services 13.0% Merchandise Exports Aluminum, Prawns, Cashews, Cotton, Sugar, Timber, Bulk Electricity Export Partners Netherlands 30.8%, India 15.2%, South Africa 14.6% Currency As of November 2017 Source: CIA Meticais (MZM) 612

7 Mozambique Country Timeline 1975 Mozambique becomes independent. Frelimo rules under single-party system with leader Samora Machel as president Renamo an anti-frelimo resistance group is set up by white Rhodesian officers as clashes with Frelimo forces escalate and Mozambique imposes economic sanctions against Rhodesia Government amends the constitution to allow a multi-party political system. Initial talks take place between government and Renamo The World Bank cancels most of Mozambique's debt under a plan promoted by the G8 nations Chinese President Hu Jintao visits, promises interest-free loans for agriculture, health and education The government announces a $500m loan from the European Union and Danish and Dutch governments to build a railway line to link the coal-rich northern Moatize mines to the port of Nacala by President Guebuza wins re-election with more than 75% of the vote. Main opposition Renamo party alleges widespread fraud, while monitors accuse election commission of lacking independence Italian energy company Eni says it's made a giant gas discovery off the coast Tension flares between authorities and opposition Renamo, prompting fears of a return to civil war IMF as well as several donors suspend funding after it was discovered the government had failed to disclose debts of more than a billion dollars Stop-start peace talks with Renamo continue, amid reports of attacks by suspected Renamo militants. President Nyusi and Renamo leader Dhlakama meet and agree to complete a peace process by year's end. Source: BBC 613

8 Lazard Emerging Markets Debt Notes 1 As of December IMF World Economic Outlook, October 2017 data 3 IMF World Economic Outlook, October 2017 data 4 Mining: Mozambique, KPMG, Country Mining Guide, 2013, accessed on 23 October 2015, Mozambique-mining-country-guide.pdf. 5 accessed 11 December Manning, Carrie, Conflict Fears Fade in Mozambique, but Renamo s Demands Do Not, World Politics Review, 26 May 2015, accessed on 23 October 2015, conflict-fears-fade-in-mozambique-but-renamo-s-demands-do-not. 8 accessed 27 November accessed 27 November IMF Says it May Revisit Mozambique-Program Talks in Early 2018, Bloomberg, 9 November IMF Mission Starts Mozambique Work; to Discuss $2b Debt, Bloomberg, 1 December Government of Mozambique Presentation to Creditors, October Mozambique Readies Eurobond as Tuna Investors Agree to Swap, April news/articles/ /mozambique-to-issue-sovereign-bond-as-tuna-investors-accept-swap accessed 27 November Government of Mozambique Presentation to Creditors, October IMF WEO Outlook October 2017 data 21 Disgruntled Mozambique bond holders form creditor committee accessed 27 November As of 27 November IMF WEO Outlook Data, October Human Development Report, United Nations, 2016, accessed on 11 December 2017, en/statistics/data/. 25 Mozambique: Substantial El Nino Predicted, All Africa, 12 May 2015, accessed on 23 October 2015, allafrica.com/stories/ html. 26 Mozambique Industrialisation strategy to be launched, Ifrastructure Development Management Ltd, 26 June 2015, accessed on 23 October World Bank Doing Business Rankings, accessed on 11 December 2017, rankings. 28 Mozambique s Government and Renamo Sign Truce, Al Jazeera, 25 August 2014, accessed on 1 October 2014, 29 Mozambique election campaign kicks off after ceasefire, Business Day, 31 August 2014, accessed on 1 October 2014, 30 Besseling, Robert, Mzambique rejects autonomy bill, final dealwith opposition likely in 2015, HIS Jane, 4 May 2015, accessed on 23 October 2015, accessed 27 November

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