Mozambique: merely muddling through
GDP growth: hopefully to bottom out
GDP growth will likely bottom out at 3.5% y/y in 2018 and 3.7% y/y in 2019, below government forecasts. Economic activity is thus subdued. In fact, the IMF says GDP growth could slow to 2.2% y/y by 2022 before accelerating to 9.9% y/y in 2023 once the Rovuma Basin liquefied natural gas exported begin. Aggregate demand will remain subdued this year, and investment will contract further. Private consumption will be constrained by low disposable income, despite easing inflation. Government expenditure will likewise remain low.
Balance of payments: delayed LNG investment could prove another shock
The BOP remains fragile and subject to shocks. Given the structural nature of the C/A deficit and limited potential to grow exports before the expected liquefied natural gas boom, growing imports could create BOP pressures. The BOP improved in 2017, with a 36.6% y/y contraction in the C/A deficit, to USD2.4bn or 19.5% of GDP, mainly driven by a 41.8% y/y increase in goods exports due to higher commodity prices and a 135% y/y increase in coal exports to USD1.7bn (or 36% of total exports). This followed another 35.6% y/y C/A contraction in 2016, to USD3.8bn, or 35.5% of GDP, which was driven by a 37.5% y/y contraction in goods imports to USD7.9bn. Historically, Mozambican trade deficits have been funded by donor support and FDI inflows, with the first falling substantially after the revelation of hidden loans in April 2016 and the suspension of an IMF-funded programme, and the second depressed due to delays in commencement of LNG projects. Subdued import demand allowed the central bank to increase gross FX reserves to USD3.3bn in 2017 from USD2.0bn in 2016, improving the import cover ratio of goods and services to 7.3-m (excluding the large projects imports) from 4.7-m.
Monetary policy: still easing
The BM will likely cut rates more aggressively this year as inflation continues to fall. We have updated our expectations of MIMO policy rate cuts from 600 bps published in our January edition to 900 bps, which sees the MIMO rate closing the year at 10.5%. Countrywide inflation was at a low of 2.33% y/y in April and a 12-m average of 9.01% y/y, and is expected to close the year much lower than the government's expected 11.9% y/y average, on a relatively stable metical and subdued aggregate demand.
FX outlook: volatility, then further strength
Economic activity is expected to remain subdued, and the impact of monetary easing on increasing disposable income, consumption and import demand will probably come with a substantial time lag, coinciding perhaps next year with FDI inflows related to liquified natural gas. We see USD/MZN staying around current levels. Low import demand due to subdued economic activity, with growing exports led by isolated large projects with limited growth spill-over effects to the rest of the economy, allowed for some relief for the FX market from the severe liquidity pressures of 2016. The USD/MZN pair fell to 59.0 by the end of 2017 from 71.2 at the end of 2016. After the BM introduced a regulatory change that allowed exporters to keep export earnings in foreign currency, the pair rose to 63.0. It has since fallen to around 60.0.