Caprazine Hunguana – Head of Treasury Execution Services at Absa Bank Mozambique
From very early on, after the turn to a market economy and the adoption of a political, economic and legal-legal framework which was more favourable to private investment, the country attracted high volumes of Foreign Direct Investment (FDI).
Some of these investments were structural for the economy, as in the case of Mozal and Vale, which significantly impacted the structure of the balance of payments through the high weight of aluminium and coal exports. Mozambique showed strong economic growth at the beginning of the previous decade, with real Gross Domestic Product (GDP) growth averaging 7.0% between 2010 and 2015 against an average of 2.4% between 2016 and 2020.
Rapid growth in the mining sector, together with the exploration and discovery of vast natural gas reserves, contributed to this strong growth. The rapid increase in FDI for coal and natural gas was also accompanied by higher investments in large infrastructure projects.
According to the Balance of Payments Bulletin for 2021, published by the Bank of Mozambique (BoM), FDI growth over the past five years was largely influenced by the increased inflow of capital from large projects, which was associated with extractive industry projects related, on the one hand, to the prospecting and research of hydrocarbons in the Rovuma Basin and, on the other, to the revitalisation of the coal industry.
Also according to the same bulletin, the flow of companies not belonging to the category of major projects showed, over the period under review, an oscillatory behaviour, characterised by increases and decreases not compatible with the trajectory of the major projects. A significant part of the investments made by companies outside the major projects aimed at responding to the demands of these FDI projects in the transport and logistics component.
In other words, there was an important FDI inflow in 2019 to the transport and logistics sector related to responses to the damage caused by Cyclones Idai and Kenneth.
In a context in which the country imports many more goods and services than those it exports, the Current Account is in deficit and the financing of this deficit has been provided by FDI, mainly after the withdrawal of direct support to the General State Budget (OGE) by donors following the discovery of the undeclared debts in 2016.
Most of this FDI is associated with large projects and these large projects have a significant value in relation to GDP, reaching levels above one third of it, as illustrated in the graph below.
It can be inferred from this graph that the FDI/GDP ratio is a forward-looking economic indicator of growth in the Mozambican economy, with GDP following the trend of the FDI/GDP ratio with a delay of about one year. In 2021, FDI recorded a sharp rebound to pre-pandemic levels, reaching USD 5.10 billion and was mainly driven by mega-project investments related to operation and maintenance works at the Moatize coal mine and the development of the Liquefied Natural Gas (LNG) projects of Total and Coral-Sul.
Data for the first quarter of 2022 shows a 37% increase over the same period of 2021, standing at USD 1.39 billion. It is expected that this trend will continue, in the medium and long term, and that it will continue to be sustained by investments in the hydrocarbon sector, without neglecting the negative impact that terrorrist actions have on TotalEnergies’ project resumption decision and Exxon Mobil’s final investment decision.
Nevertheless, the security situation in the north of the country and the current geo-political situation arising from the conflict in Ukraine present an opportunity for greater exploitation of Mozambique’s energy resources, since it has become evident that most of the countries importing these resources need to diversify their sources as a way of reducing their dependence to strategically acceptable levels.
The country’s capacity to quickly promote new investment projects in the sector and relaunch existing projects is an enormous challenge for taking advantage of this opportunity. Other challenges that must be prioritised include: (i) the reduction of trade barriers in order to promote investment in sectors such as agriculture, which has a weight of one fifth of GDP, but whose production is very far from satisfying domestic consumption; (ii) promotion of Special Economic Zones, including Free Trade Zones, which guarantee important investment flows and ensure the development of local industry and create employment; (iii) management of fiscal and monetary policies that promote the reduction of the cost of doing business in Mozambique, with emphasis on reforms that improve the country’s rating from “extremely speculative” to “investment grade” and a low interest rate environment that allows economic operators better access to the debt market (iv) adopting bold measures to boost business through the Stock Exchange, giving nationals the opportunity to invest their savings in investments with a different risk/return profile from bank deposits and for companies to have financing alternatives other than bank debt (v) reducing the administrative burden applicable to start-ups; (vi) using land use and benefit titles as collateral; (vii) fighting corruption in all sectors; and (viii) approving a local content law that strikes a balance between the interests of Mozambicans and those of foreign investors in mega-projects.
With regard to public finances, the resumption of IMF and donor support for the OGE is already providing relief, but it is even more important that the country rapidly leaves the situation of dependence on external support.
Mozambique’s economic growth prospects remain closely linked to its developments in LNG, and the economy will remain heavily dependent on trade in commodities.
FDI in the LNG sector will accelerate economic growth to pre-2016 levels in the coming years, but there is a need to ensure that the country attracts investment into other important sectors of the economy to immunize it from frequent commodity price shocks.