Real GDP growth will continue to underperform in Mozambique overthe coming quarters, as the government’s ongoing default weighs oninvestment and multilateral support. While the outperformance of theinfrastructure, natural gas, and mining sectors will offer some stimulus,growth will remain below its historic trend and risks are heavily skewedto the downside.
Limited access to financing in the wake of Mozambique’s unresolvedsovereign default will see the government’s budget deficit narrow furtherover the coming quarters. The country’s constrained fiscal positionwill encourage the government to reach a deal with its creditors inforthcoming negotiations over its ongoing default, in the hope it willexpedite re-engagement with multilateral lenders.
A significant ramp-up in coal production over our short-term outlookwill not be sufficient to narrow Mozambique’s substantial current accountdeficit given continued demand for imports. While the country’sexternal position represents a large potential threat to the economy,foreign investment will remain sufficiently robust to avoid any balanceof payments crisis.
The Banco de Moçambique will put on hold any further monetarystimulus until economic conditions have stabilised. Despite coolinginflation and a more benign outlook for the local currency, concernsover economic stability will encourage the bank to leave interest ratesunchanged until 2018, when less price volatility will prompt a gradualeasing cycle.
The Banco de Moçambique will continue to manage the metical’s floatingpeg to the US dollar over coming months, benefiting from a modestuptick in foreign reserves. That being said, while this will limit someof the immediate downward pressure, the metical will likely continuealong a depreciatory trend over a longer-term outlook to 2019, asinward investment struggles to finance a large current account deficit.
The risk of rising popular discontent with its reputation for economicmismanagement will encourage Mozambique’s government to pursuepeace in the ongoing conflict against the RENAMO insurgency.
However, any progress will be tentative and systemic governmentcorruption will remain a key risk for any potential investors.