After a 1.3% contraction in 2020, economic activity shows signs of a new slowdown throughout 2021, according to the economic indicators made available by INE, CTA and the Bank of Mozambique. This evolution was observed in the 1st quarter both at the level of private consumption and investment, which resulted in a reduction in imports of goods (favoring, in this case, net external demand).
This trend is expected to continue throughout 2021. In this sense, in a context of recession in many of Mozambique’s important trading partners, such as South Africa, India and the Hinterland Countries, and assuming that the government and monetary authorities maintain the policies followed until now, it is expected that the real growth of the economy will be in a range between 1% and 0.5%.
This register will correspond to a slowdown in private consumption, due to the cooling down of internal and external transfers, the policy of wage control (both in the private sector and in the public sector) and as a result of the slowing down of domestic credit. In terms of investment, due to less favorable internal and external financing conditions, a slowdown should also be registered.
The growth rate of exports of goods and services should also slow down, with this evolution being very sensitive to the behavior of the extractive industry sector. However, it is necessary to keep in mind the existence of some negative risks for the Outlook, mainly related to the internal environment, namely the pandemic scenario and the instability in Cabo Delgado that led to the suspension of the activities of the largest private investment in the LNG sector.
The restrictive demand policies carried out until the beginning of 2021 and the strong interventions of the Central Bank have contributed to a significant appreciation of the Metical against the US Dollar (23% y/y), quoting around USD/MZN 57.02 and EUR/MZN 68.96 at the end of Apr-21.
The prospects that the Central Bank has for price developments in the short term seem relatively favorable, given the evolution of the foreign exchange market
These developments contributed, in turn, to a fall in year-on-year inflation to 5.19% (5.76% in Mar-21). While it is true that the increase in imports associated with the investment effort has translated into an increase in the current account deficit (60.6% of GDP in 2020), the capital inflows to curb the pandemic and the stability of the financial sector have allowed for a comfortable level of foreign reserves (around USD 3.9 billion).
The sale of the mining and logistical assets of VALE (transaction expected in 2H 2021), will contribute to the inflow of capital gains and therefore strengthen the accumulation of international reserves, necessary to cushion exchange rate pressures, thus reversing the restrictive stance of monetary policy, anchored in expectations of low inflation (forward looking).
In this context, the monetary authority decided in May to maintain the policy interest rate at 13.25%, the second consecutive time since March 17, 2021. Overall, the Central Bank continues to express concerns about inflationary pressures, although a more dovish sentiment seems to be emerging within the Monetary Policy Committee.
This fact seems to derive from the monetary authority’s own evaluation of this aspect, by admitting that the peak in terms of price growth should occur during the 1st quarter of 2021 (with a register of 5.76% y/y in the month of Mar-21). Moreover, the perspectives that the Central Bank has for the evolution of prices in the short term seem relatively favorable, given the evolution of the exchange market.
There are, however, risks to the achievement of this objective, which may turn out to be in opposite directions. On the upside, one of the factors of greatest concern has been the exchange rate of the Metical. Accompanying the climate of uncertainty and instability associated with the military crisis in Cabo Delgado, private sector investment has slowed exacerbating inflationary risks stemming from imported commodity prices and the subsequent impact on domestic prices.
But if the pandemic crisis deepens, aggravating international instability and consequently weakening the national currency, the central bank will be faced with a dilemma: either it will tighten monetary policy, holding the metical to defend inflation, or it will adopt a more flexible stance with risks to the evolution of prices but valuing growth first
It is not evident, however, that this movement constitutes a permanent shock. In fact, the national currency has proven to be a volatile currency, closely following the pulse of international risks, so the sharp appreciation that has been experienced may be reversed with an intensity of the same (or greater) nature in the near future, if security is not restored in areas affected by armed conflict.
The possible negative effects on domestic prices may be attenuated if external demand improves and the resolution of the sovereign debt crisis takes significant steps in the renegotiation with Creditors (relieving the pressure on public accounts, creating room to reverse the monetary policy framework), and thereby calming the anxiety and volatility of the markets.
But if the pandemic crisis deepens, worsening the instability at the international level and, consequently, the weakening of the national currency, the Central Bank will find itself facing a dilemma: either it will tighten monetary policy, holding the Metical in order to defend inflation, or it will adopt a more flexible stance with risks to the evolution of prices but valuing growth first.
It is to be expected that, in a scenario of deteriorating health conditions and the ensuing shock waves, the Central Bank will center its priority on inflation and not on the The recent past illuminates what may occur in the present.
