AMR: Mozambique

GDP growth – external assistance and foreign direct investment to support growth

We now lift our GDP growth forecast to 3.4% y/y for 2022, from 3.1% y/y previously. Most public health restrictions were lifted in Apr, which should support growth. Growth may reach 3.8% y/y in 2023 as external assistance supports government expenditure and liquified natural gas (LNG) investment advances. Security in Cabo Delgado permitting, we could see Total’s LNG project resuming construction in H2:22, with corresponding FDI supporting GDP growth. Growth here would be heavily dependent on FDI and external support.

Furthermore, the recently approved IMF 3-y Extended Credit Facility (ECF) arrangement of USD456m to  support structural reforms will focus on fiscal reforms and transparency, governance and debt management. This program may trigger increased donor assistance. Moreover, the  World Bank will submit to its board for approval the resumption of general budget support with USD300m for this year. Budget support was suspended in 2016 when undisclosed  loans of over USD2bn had come to light.

Balance of payments – FX reserves should benefit from IMF’s ECF and increased external assistance

We expect the C/A deficit to remain elevated, at over 23% of GDP in 2022, from around 22% of GDP in 2021, then accelerating towards 29% of GDP in 2023 as LNG investment, which carries a large import component, advances. Even without considering LNG investment, higher prices of essential imports, including fertilizer and fuels, may keep the import bill elevated as the economic recovery gathers pace. However, the currently favourable outlook for commodity prices may help contain external pressures. The commencement of LNG exports from ENI’s floating platform too should support exports. With an IMF funded program in place, we expect loan disbursements to stem the decline in FX reserves.

Monetary policy – still a tightening bias

We see the Banco de Moçambique maintaining a tight monetary policy even as inflation risks remain elevated. Still, our base case sees policy rates being kept on hold for the remainder of this year. The BOM hiked policy rates by 200 bps in Mar, which pushed the MIMO rate to 15.25%, after the 200 bps rate hike early in 2021. The BOM MPC noted in May  that underlying inflation – which excludes administered prices and fruit and vegetables, and is generally affected by monetary policy, is stable. The MPC also sees inflation in single digits, supported by a stable metical.

FX outlook – FX rate flexibility could buffer temporary BOP pressures

Our base case puts the currency at 61.6 by Dec as the USD/MZN pair starts to float again from H2:22, after having remained unchanged at 63.8 for the past 9-m regardless of FX liquidity. Once the metical starts to float again, we see an appreciation bias in the short term on an expected improvement in FX liquidity driven by increased external assistance. The maintenance of a tight monetary policy to combat inflation too should subdue import demand outside the large projects imports, thereby improving FX liquidity and protecting FX reserves.

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