Economic and Financial Research
CHALLENGES AHEAD FOR 2016
Economic activity continued to decelerate, with a cumulative GDP growth rate of 6.1% y/y for the first three quarters of 2015. As a result, the annual growth rate for 2015 should fall below the average growth rate performed over the past years of around 7%, mainly reflecting a deceleration in foreign investment inflows, a tighter fiscal policy, lower external receipts (due to falling commodity prices) and the subsequent devaluation of the Metical.
Despite the budget deficit slippage in 2014, the Executive remains committed to ensuring a steady adjustment of the public finances. The 2015 public deficit should have declined significantly compared with the preceding year, and the fiscal adjustment should continue in 2016, albeit at a smaller pace. Still, public debt is likely to remain on the rise, at a time when the public debt ratio is already beyond a prudent level. Such concerns related to the sustainability of public debt, as well as the trend of economic growth deceleration, were reflected in several international rating downgrades.
The external accounts deteriorated in 2015, due to slower mega-project activity, a decline in grants and a reduction of foreign direct investment. The current lower commodity prices continued to hurt export growth while goods imports outside of the mega-projects, sector have remained resilient. On the other hand, lower imports of services and goods related to mega-projects confirm the deceleration reported in this sector. While the current account deficit for 2014 decreased in comparison to the preceding year, the deficit actually deteriorated when removing the effects from the mega-projects.
The exchange rate had remained relatively stable over the past few years, but the pressure exerted on the balance of payments in 2015 has resulted in a strong devaluation of the local currency. The Metical has gradually devalued throughout 2015 (with a more abrupt drop in November), which resulted in a loss of around 50% of its value since the start of the year, this despite attempts by the Central Bank to alleviate the pressure on the exchange rate. In this context, the stock of international reserves also suffered a sizeable deterioration, from US 2.88 billion in late 2014 to USD 1.97 billion by November 2015. Excluding mega-projects, the coverage ratio of imports of goods and services in 2015 should fall below a 4 months threshold, which is considered an adequate level to ensure protection from possible external shocks. The effects of this exchange rate deterioration have already had a significant impact on the inflation rate, a scenario that is likely to continue throughout 2016. Anticipating this, the Bank of Mozambique immediately adopted a tighter monetary policy, and decided to raise the main monetary policy interest rates, as well as the required reserves ratio. Nevertheless, these efforts were not sufficient to contain pressure in prices, with the inflation rate reaching a double-digit level in the last month of the year (10.55%). In this context, we believe that the Central Bank should go beyond a tighter monetary policy and adopt measures aimed at restoring exchange rate stability, which could possibly involve restricting demand for foreign currencies.