Mozambique: a bumpy start

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Mozambique: a bumpy start

7:54 CAT | 10 Feb 2021

File photo: DW

Africa Flash Note

Mozambique is off to a bumpy start this year, prompting a downward revision to our growth forecasts of earlier this year in the Jan edition of African Markets Revealed publication. We now factor in the expected negative impact of the 300bps policy interest rate hike to 13.25% from 10.25% at the Jan Monetary Policy Committee (MPC) meeting.

Consequently, the prime lending rate will likely rise to 18.5% in Mar, from 15.5%. In the wake of the policy rate hike, we saw T-bill yields rising by 462bps to 550bps, to 12% and 12.8% respectively for the 91-d and 364-d tenors.

We suspect that the Bank of Mozambique (BOM) is keen to strengthen its monetary policy effectiveness ahead of a possible implementation of “inflation targeting”, which still would nevertheless require regulatory changes and political debate. Our base case now sees GDP growth for 2021 at 1.6% y/y, 0.2 ppts lower than what this scenario had foreseen in the Jan AMR. The base case sits between the low of 0.5% y/y expected in the updated bear case and the high of 2.0% y/y from the updated bull case.

The MPC seems concerned about a sharp increase in inflation arising from FX rate passthrough; the passthrough from currency weakness into inflation had remained relatively muted last year mainly due to targeted policy interventions that had alleviated inflation pressures. And so, average inflation rose to 3.1% y/y in 2020, from 2.8% y/y in 2019. In 2020, the MZN depreciated by 17.9% y/y, 14.1% y/y and 25.1% y/y respectively against the USD, ZAR and EUR; this may well lift imported inflation.

Furthermore, we see the current monetary policy stance sufficient enough to discourage imports, while also sending a signal to the government to contain public spending, which, combined with increased flexibility in the management of FX reserves, should improve FX liquidity in the market and, ultimately, stabilize the MZN.

Since early Feb, the BOM has started selling FX to commercial banks, signalling some tolerance for pressure on FX reserves, last reported at an historical high of USD4.1bn, representing over 6-m of import cover, excluding large projects imports. This, combined with the reintroduction of plain vanilla FX derivatives, following recently approved regulations that enters into effect in Mar, helps improve our 2021 year-end USD/MZN forecasts to 72.4 in the base case from 80.3 previously in the Jan AMR. At the time of writing, the USD/MZN pair was at an official level of 75.3, relatively stable since the beginning of Feb.

Our base case sees the MPC holding the MIMO rate stable at its current level for the entire forecast period. The bull scenario sees an improvement in the inflation outlook, with likely a 100bps policy rate cut in Q2:22. Our bear case factors in worsening security challenges, increased Covid-19 restrictions and a further negative impact from climate change events, resulting in higher inflation and a 100bps interest rate hike to 14.25% in Q3:21. Notably, across all three scenarios, we still expect inflation to stay in single digits.

Negative events could emanate from climate change impacts on the current season that typically ends around Apr/May, a further deterioration in security in the northern province of Cabo Delgado and resultant rising humanitarian relief needs, an increase in Covid-19 restrictions, and further delays in LNG investment — all of which could incur a higher fiscal deficit, a weakening MZN, higher inflation, and lower growth.

Positives could include a material decline in Covid-19 infections and an earlier restart of the Mozambique LNG plant construction, pending the likely announcement of the disbursement of the USD15.5bn project finance facility for the Area1 project which was approved last year.

Fausio Mussa

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Source: Standard Bank / Africa Flash Note