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Standard Bank Economic Briefing: “Sustainable Growth Requires Diversification Beyond Gas”

Standard Bank Economic Briefing: “Sustainable Growth Requires Diversification Beyond Gas”

On Wednesday 27th March, Standard Bank held its 20th Economic Briefing in Maputo, a benchmark event in economic analysis in Mozambique, through which the institution provides clients, businesspeople and society in general with a set of relevant information, indicators and perspectives on the possible paths of evolution for the economy of Mozambique and the world as a whole.

During the meeting, entitled “Mozambique: How to grow beyond gas?”, the role of the public and private sectors in making investments that can boost more inclusive and sustainable growth was debated, “and not just based on the natural gas produced, but beyond it”, as Standard Bank CEO Bernardo Aparício mentioned from the outset, setting the tone for what would be repeated several times throughout the session by the various speakers. “It’s inevitable that gas will be a relevant economic factor,” he began. “The question is how we can leverage the growth of sectors such as logistics and agriculture, through partnerships between the public and the private sector, between foreign and domestic investors and between the various sectors of the economy. We’re talking about opportunities here, not problems.”

“Economy in recovery”

It was then up to the government, represented by the Deputy Minister of Economy and Finance, Amílcar Tivane, to emphasise the importance of debates like this in order to better understand the expectations for growth and development of the Mozambican economy. “The country’s economy is in a process of recovery. However, it faces several challenges. The main one is to guarantee the funding needed to sustain these processes. It is crucial to ensure that companies from all sectors continue to invest, strengthening confidence and maintaining hope, mainly through decisions that take into account the public policies established by the government. In this context, it is also important to discuss macroeconomic issues. In order to guarantee investment capacity, it is important to strengthen economic fundamentals in general. Currently, the economy has shown average growth of 4.7 per cent over the last few quarters, with inflation remaining relatively stable,” pointed out the Deputy Minister for the Economy and Finance, while emphasising the reduction in inflationary pressures and the need to address the issue of public investment and the implementation of reforms to guarantee the sustainability of public debt. “It’s important to channel more resources into the private sector, especially to strengthen its connections with other economic sectors, taking advantage of the gas sector’s transformative role in the economy,” he concluded.

Global Analysis: Better than Worse, so far…

In the eagerly awaited analysis by Standard Bank’s chief economist, Fáusio Mussá, the global economic context served, as usual, as a backdrop to contextualise the current times and what can be expected in the coming months in the world, and in Mozambique, from inflation to global growth marked by conflicts and geopolitical tensions. “There is a strong expectation that the advanced economies will be able to reduce interest rates in a synchronised manner by the end of the first half of the year. At the exchange rate level, the European currency has remained stable against the dollar, but it is likely that, as conditions change, the growth differential between the US and the rest of the world will narrow. This, combined with the strong performance of the American stock market, could result in the dollar rising against the euro over the next two years, forecasting an exchange rate of 1.2,” he explained.

Looking at the global growth forecast for this and following years, Fáusio Mussá points out that “the IMF and we at the Bank believe that we are facing a ‘soft landing’ scenario, a soft landing of growth in the advanced economies. It’s important to have this expectation. If this fight against inflation had resulted in recessions, the price of commodities would have fallen sharply, and that wasn’t the scenario. On the other hand, this would have discouraged investment. In these times, investments run away from exposure to risk and the developing countries suffer the most,” he emphasised. “Moments of greater restriction in global supply, such as the recent conflicts in Ukraine and the Middle East, are generally associated with inflationary pressures, which indicates the need for caution when formulating policies in both advanced and emerging economies, such as ours,” he added.

Less Investment, More Dependence on Natural Resources

“Exporting many ‘bis’ of gas may not imply growth. In Angola, for example, they export 33 bis, the state charges 10.5 bis, but the market has a lower average supply of foreign currency than Mozambique, for example. In other words, if you think that today it’s difficult, in an economy of 21 billion, to operate with a greater supply of dollars than an economy of almost 100 billion…,” said Standard Bank’s chief economist, Fáusio Mussá, concluding that “the absolute value of exports often doesn’t mean anything,” getting to the crux of the session: not depending exclusively on gas revenues, which are currently worth 1.2 billion in exports to Mozambique, since the Area 4 FLNG unit began operating last year.

In recent years, poverty has increased from 53 per cent to 68 per cent in an economy dependent on FDI, foreign currency and agriculture, and the average income in Mozambique will stagnate at 8,000 meticals in 2022. And after a year of growth, leveraged by this new income from gas exports, the outlook for this year, Mussá pointed out, is for a “slowdown this year and next. Why? Because last year we exported 3.4 million tonnes of gas compared to the previous year, when there were no exports, but this base effect will no longer exist this year or next,” he points out.

“There are prospects that Area 1 will soon resume investment. There have been operations that have never stopped, but the Area is once again at an accelerated pace of activity. We expect the lifting of force majeure to be announced soon, which will greatly improve the medium-term outlook. However, it is unlikely to result in an economic transformation unless the state creates the fiscal space for it. We need to discuss how the private sector can participate in this effort to transform the national economy,” he said.

Economy Growing Less and Inflation Falling

For this reason, and also because of the fiscal obligation or the state’s commitments with the treasury bonds that are due next year, with a smooth repayment that will take away the private sector’s financing capacity, in favour of the state being able to continue to operate without disrupting the economy, the economy’s growth will be even more timid from next year onwards. “Standard Bank forecasts growth of more than 12 per cent only in 2027, and we will see economic growth slow down to 4.6 per cent this year and next, compared to 5 per cent in 2023.”

Inflation and Monetary Policy:

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“The bank’s forecasts also indicate that we could see a drop in year-on-year inflation to levels below 3 per cent as early as June, before starting a seasonal rise in the second half of the year,” revealed Fáusio Mussá. “The rapid drop in year-on-year inflation from 5 per cent in December to 4 per cent in February was notable, and if we remember the peak of 13 per cent in August 2022, when the pressure of fuel and food prices resulting from the war in Ukraine generated inflationary pressures globally, there is a big difference,” he recalled.

Standard Bank’s chief economist also said that “despite the decline – which in January allowed the start of a cycle of monetary policy interest rate cuts – we note that financing conditions will most likely remain tight, in a context of persistent fiscal pressures and a weak supply of foreign currency,” he concluded.

Private Sector ‘Stalled’. Consumer credit on the rise

As a result of this scenario, it’s not surprising, in Fáusio Mussá’s opinion, that credit to the private sector in annual terms “contracted by 10 per cent last December”. This is explained by the fact that “companies, considering the high interest rates and the weak outlook, made the rational decision not to seek financing, which is understandable at this time. According to our monthly PMI, the private sector is at a complete standstill at this stage,” he pointed out. “On the other hand, there has been significant growth in financing to private individuals, which suggests that banks are willing to lend. Car imports grew by 14 per cent last year. The other reason for this growth is the increase in imports of construction materials (16 per cent last year).”

Little Liquidity in Foreign Currency

One of the themes of recent months has to do with the lack of dollars on the market, something that for the economist is easily explained: “The central bank has endeavoured to restore reserves and, even after the oil price increases in 2022, it continued to support fuel imports, something that has since changed. But in an economy like ours, it’s important to have a ‘cushion’ for external shocks, which means that in a short space of time, we’ve gone from having less reserves than three months of imports to more than 4.3 months of imports (more than 3 billion dollars), close to the African average of around 4.5 ‘bis’. We believe that once the BoM reaches the reserves it considers comfortable, it can open up space to sell currency on the market, something that is scarce, as we know,” he said.

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