thea fourie - ihs - sovereign risk in mozambique and implications for coal mining

© 2015 IHS

Presentation

ihs.com

IHS

Burning bridges Is Mozambique heading for a sovereign risk crisis?

Thea Fourie, SSA Senior Economist, Tel: +2712 622 9660, [email protected]

28 July 2015

ECONOMICS AND COUNTRY RISK

© 2015 IHS

Burning bridges Is Mozambique heading for a sovereign risk crisis?

Sovereign risk outlook:

Near-term: liquidity challenges, not

solvency problem

Long-term: strong growth to support

sovereign risk rating

Structural changes set off concerns:

Shift in the financing of the current

account deficit

Less foreign donor aid places fiscal

budget under pressure

Slow increase in Mozambique’s

external debt holdings

© 2015 IHS 3

Structural shifts in Mozambique’s economy


Burning bridges, is Mozambique heading for a sovereign risk crisis? / July 2015

© 2015 IHS 4

Fiscal deficit widens as donor aid flows moderate

Burning bridges, is Mozambique heading for sovereign risk crisis? / July 2015

-12

-10

-8

-6

-4

-2

0

2

99 01 03 05 07 09 11 13 15

Fiscal deficit shows significant

deterioration since 2014

Source: IHS © 2015 IHS

% o

f G

DP

0

10

20

30

40

50

60

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% o

f to

tal sp

en

din

g

Wage bill as % of total spending

Interest payments as % of total spending

Capital expenditure as % of total expenditure

Slow up-tick in public sector wage bill


Slow up-tick in public sector wage bill


2

3

4

5

6

7

8

9

10

11

0

200

400

600

800

1000

1200

1400

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% o

f G

DP

US

D

Budget support per capita (LHS) Budget support as % of GDP (RHS)

Budget support per capita falling


© 2015 IHS

Fiscal deficit (after grants) financed primarily through

external borrowing

5

Burning bridges: is Mozambique heading for a sovereign risk crisis? / July 2015

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-10

-8

-6

-4

-2

0

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% o

f G

DP

MZ

M

billio

ns

Budget deficit (including grants) Net external borrowing

Net domestic borrowing Privitization

HIPC assistance by IMF Deficit (after grants) as % of GDP (RHS)

Government deficit after grants financed by external borrowing


© 2015 IHS

Foreign loans play larger part in financing of the

widening current account deficit

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Burning bridges, is Mozambique heading for sovereign risk crisis? / July 2015

Sizeable investment imports by the natural resource sector since 2011

-50

-40

-30

-20

-10

0

10

-10000-8000-6000-4000-2000

02000400060008000

10000

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14(F)

15(F)

Other investment inflows (LHS) FDI inflows (LHS)

Current account balance (LHS) CA as % of GDP (RHS)

CA (including FDI inflows) as % of GDP (RHS)


US

D m

illi

on

s

% o

f G

DP

FDI inflows finance widening current account deficit, but other loans starting to

increase as government & private borrowing increases

© 2015 IHS 7

External debt has been increasing, but debt

fundamentals still relatively solid

Sovereign risk

matrix

Risk rating:

B+ on generic scale

Public and public

guaranteed debt as % of

total external debt

holdings (2013)

90%

Short-term debt as % of

total external debt

holdings (2013)

4.5%

Interest payments as % of

foreign exchange earnings

(2013)*

0.6%

Import cover ratio (2013) 3.0

months of imports of

goods and services

Liquidity gap (2013)** 74%


0

20

40

60

80

100

120

99 01 03 05 07 09 11 13 15 17 19

External debt as % of GDP


* Foreign exchange earnings = exports of goods

and services plus transfer inflows

** (-CA + debt servicing cost)/(foreign exchange

earnings)

© 2015 IHS 8

Short-term sovereign risk outlook for

Mozambique’s economy



© 2015 IHS

Short-term sovereign risk outlook for Mozambique’s

economy

Sovereign risk triggers:

• Liquidity demands not met through FDI

inflows but rather excessive external

borrowing.

• Fiscal discipline not implemented in the

near-term.

• Lower international commodity prices.

Unexpected rise in debt servicing

obligations.

• Risk mitigated by solid relations with

IMF and possible debt restructuring.

Impact on coal sector: slow infrastructural development

https://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&ved=0CAcQjRw&url=https://www.travelblog.org/Photos/5947480&ei=dvuTVffUN4i07Qa5y4aQAg&psig=AFQjCNHsi60BzcGWpX18KHhp-1aSRBaAWA&ust=1435847649724097

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Massive social needs of population will remain high

Human Development

Indicators

Life expectancy at

birth

50.3 years

Adult HIV prevalence

rate

11.1%

Literacy rate

(% age 15-24)

67%

Old age pension

recipients (% of

statutory pension age

population)

17.3%

Population earning

less than $1.25/day

60%

Source: 2014 Human Development Report

Burning bridges, is Mozambique heading for a sovereign risk crisis? / Juiy 2015

0

100

200

300

400

500

600

700

800

900

1,000

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Per capita government welfare payments and subsidies (MZM)


0

2

4

6

8

10

12

14

16

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Public sector investment as % of GDP


© 2015 IHS

Government spending reeled in over the medium-term

to bring down budget deficit-to-GDP ratio to 5% by 2019

11


Government finances 2011-2019

Percent of GDP

2014 2015 2016 2017 2018 2019

Tax revenue 27.3 25.4 25.5 25.6 25.7 25.9 Total expenditure and net lending 41.9 36.4 36.0 35.2 34.3 33.5

Compensation of employees 11.1 10.7 10.2 9.8 9.5 9.1

Interest on public debt 1.2 1.2 1.5 1.6 1.6 1.8

Transfer payments 4.0 4.0 4.0 4.0 4.0 4.0

Capital expenditure 14.5 13.9 13.4 12.2 12.1 11.7

Overall balance after grants -10.6 -7.5 -7.3 -6.5 -5.8 -5.0

Grants received 4.0 3.6 3.3 3.1 2.9 2.6

© 2015 IHS

Commodity prices unlikely to show sharp rebound in

the near term

12


25

27

29

31

33

35

37

39

41

1.5

2

2.5

3

3.5

4

4.5

5

20

09

:1

20

09

:3

20

10

:1

20

10

:3

2011:1

20

11

:3

20

12

:1

2012:3

20

13

:1

20

13

:3

20

14

:1

20

14

:3

20

15

:1

20

15

:3

20

16

:1

20

16

:3

20

17

:1

20

17

:3

MZ

M/U

S$

Index 2

001:

1=

100

Material Price Index (LHS) MZM/US$ (average) (RHS)

IHS Materials Price Index vs Metical exchange rate


Weak currency pushes up Mozambique’s government’s debt servicing costs

© 2015 IHS

Medium-term liquidity needs come down as LNG gas

production commences in Mozambique

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*Liquidity gap = (-CA + debt servicing cost)/(Foreign exchange earnings) %

Investment and consumer-related imports projected to remain high.

Commencement of LNG production by 2020 to significantly ease liquidity needs

in economy. Near-term liquidity pressures mitigated by IMF assistance

0

20

40

60

80

100

120

140

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

IHS External liquidity gap*


© 2015 IHS

Impact on coal sector – political risk implications

• Tightening of controls on capital and currency convertibility

• Including strict measures on dollar deposit accounts and prohibitive regulations on

exchanging currency.

• Removal of tax incentives for expatriates, import and VAT taxation on capital

equipment.

• Follows demands for greater state participation and an increase in local benefits from

the extractive sector.

• Rail infrastructure project delays or cancellation

• Plans for new port in Macuse province and a railway connecting Macuse to the Moatize

are uncertain given current low coal price.

• Without the Macuse line, the Nacala Corridor and Sena railway lines are unlikely to

unblock accumulated coal stockpiles.

• Delayed payment to state contractors, especially in construction sector and

potential review of EPC contracts leading to project cancellation

14


© 2015 IHS

Medium-term sovereign risk outlook for Mozambique’s

economy

Sovereign risk triggers:

• Current account position improves

significantly as LNG production

commences. Liquidity needs drop

significantly.

• Strong growth support debt

servicing capabilities.

© 2015 IHS

Strong GDP growth will ensure timely servicing of

external debt

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0

200

400

600

800

1,000

1,200

13 14 15 16 17 18 19 20 21 22 23 24 25

MZ

M b

illi

on

s

Agriculture & fishing Manufacturing Construction

Mining and quarrying Electricity and water Services

Mining sector becomes bigger contributor to growth


© 2015 IHS

Current account shows considerable improvement over

the longer-term

18


-50

-40

-30

-20

-10

0

10

13 14 15 16 17 18 19 20 21 22 23 24 25

% o

f G

DP

Commencement of LNG production pushes current account into surplus position

by 2021


© 2015 IHS

Risks that could alter the growth outlook……

Upside risk:

• Global rebound is stronger than currently expected.

Downside risks:

• Fiscal discipline deteriorates.

• Commodity prices stay lower for longer.

• Global demand disappoints to the downside. Mega-projects are

delayed.

• Skills and infrastructural bottlenecks increase.

• Political developments: land or other regulatory issues become an

obstacle to development.

19


© 2015 IHS

Bottom line

Short-term outlook:

• Liquidity needs increase as strong FDI-spending fuels import demand.

• Lower donor aid flows widens budget deficit.

• More concessional borrowing increases Mozambique’s external debt

holdings and debt servicing obligations.

Medium-term outlook:

• Liquidity demand slows as current account move towards surplus

position.

• Strong GDP growth ensures debt servicing capabilities.

20


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ECONOMIC AND COUNTRY RISK

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