construction Economy Energy FDI Finance Gas Infrastructure Mozambique Natural Resources Opinion

Financial Times: Mozambique hit by commodity price fall

Approximate reading time: 4 minutes

Cranes tower over buildings across Maputo, from new office blocks to a huge Chinese-owned five star hotel. Industrial drills and grinders add to the cacophony emanating from the city’s increasingly traffic-clogged streets.

The capital of Mozambique bears all the hallmarks of a city in the throes of a boom. But beneath the ‎surface is an economy under stress, hit by the collapse in commodity prices and global economic volatility that is blighting some of Africa’s brightest prospects.

“It will be tough,” says Salimo Abdula, a prominent businessman, bemoaning the recent marked slowdown in economic activity.

For much of the past decade, Mozambique has been one of the continent’s hottest investment destinations, largely due to the discovery by oil companies Anadarko and ENI of vast offshore gasfields with the potential to bring in billions of dollars of investment and transform one of the world’s least developed nations into one of its top producers of liquefied natural gas.

But just as the slump in oil and metal prices has hit Africa’s top commodity exporters, from Nigeria to Zambia, it is hurting poorer nations hoping to be among the next generation of commodity exporters. The trend is radically altering the narrative of the Africa growth story — one of the few bright spots in the global economy in recent years.

Illustrating the travails Mozambique faces, the International Monetary Fund last week announced it had agreed to loan the government $286m. It still forecasts growth of 6.3 per cent for Mozambique this year — far healthier than its estimate of 3.75 per cent for sub-Saharan Africa but markedly less than the country has been used to.

“Mozambique is currently experiencing an external shock associated with the drop in commodity prices, lower growth in trading partners, and delays in investment associated with large natural resource projects,” the IMF said.

The country’s annual growth rates have been in excess of 7 per cent in recent years, and the congested streets of Maputo pay testament to the trickle-down effects for the city’s small but growing middle class — the number of vehicles imported annually has nearly trebled to more than 52,000 over the last decade.

FT-chart

The consortiums led by Anadarko and ENI were expected to announce their final investment decisions on the gas projects this year, but these are now expected to be delayed until 2016. A nascent coal sector has been hit by infrastructure bottlenecks and falling coal prices.

The impact of the economic slowdown has been particularly conspicuous in the construction and real estate sectors that were driving Maputo’s boom.

“Suddenly foreign investment is decreasing [and] the state is highly in debt,” says Andre Vilas Boas, country manager of Soares da Costa, a Portuguese construction company. “We are in an economy with no liquidity and we are waiting.”

Although bankers and businessmen say they are optimistic that the economy will rebound, the country faces a number of challenges.

Like other emerging market currencies, the metical has depreciated sharply this year, falling about 30 per cent (CHECK) against the US dollar, hurting importers in a nation dependent on goods from abroad. The government’s foreign reserves have shrunk by a quarter to $2.3bn and it is battling a budget deficit that hit 10.4 per cent of gross domestic product last year.

Mr Abdula, head of Intelec Holdings, which has interests in a variety of sectors, says a slowdown in government spending and increasing delays in its payment of bills is having a ripple effect across industry.

“If they pay, they pay very slowly, but it affects all the systems because it’s like a cascade,” says Mr Abdula. “Many of the companies have faced this cash flow [problem]; I don’t know how long they can hold.”

Domestic factors also play a role in the changing outlook. The government’s decision two years ago to back a controversial $850m bond to set up a tuna fishing company has left it responsible for $500m of the company’s debt, heaping additional pressure on its meagre resources.

Businesses are also grappling with a shortage of dollars. Imports have continued to grow at 17 per cent year-on-year but exports have stagnated.

The knock-on effect is visible around the capital. Hotels that were until recently enjoying 90 per cent or higher occupancy rates are now around half full; rents and property prices have tumbled.

“It’s difficult for some developers to fund the buildings. Previously you could secure 70 per cent off-plan, now you can secure 5-10 per cent off plan,” says Adrian Frey, the Mozambique head of real estate group Pam Golding. “It’s an important learning curve for Mozambique that it’s not always going to go up.”

Few doubt the gas projects will proceed eventually and executives remain optimistic about Mozambique’s potential, but for now the hype of recent years has been replaced by a degree of uncertainty.

“We believe it’s a question of time,” says Ismael Faquir, country head of Ernst & Young. “But of course looking at the price of commodities, everyone is worried because we started the discoveries when the price of oil and commodities was high, and today everything that we have has had a significant decrease in price.”

Article by: Andrew England for the Financial Times

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