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Mozambique’s Confederation of Economic Associations updated report on COVID-19 impact on business sector

In March of 2020, during the first weeks of the coronavirus global health crisis, in a study published by Mozambique’s Confederation of Economic Associations (CTA), aimed at analysing and projecting possible outcomes following the impact of Covid-19 in the Mozambican economy and the country’s business sector, CTA offered measures for mitigating such an impact.

The study was well-received among all the relevant stakeholders, such as the Government, private sector and the civil society, serving as a base for the discussion and creation of strategic policies finely adapted to minimising the socio-economic damage the pandemic could cause to Mozambique’s economy.

Now, four months later, and with a greater knowledge of the global impact and possible solutions thereafter, CTA is now publishing an updated version of that previous report, looking at variables such as the business activities of the Mozambican corporate environment, their overall performance during times of pandemic, employment and economic growth, as well as a deeper analysis on the effectiveness of the Government’s political measures implemented thus far, with possible corrective measures to follow.

With this new, more in-depth approach, CTA is now implementing a new methodology for carrying out its analysis, having created a new “Corporate Robustness Index”, comprised of 3 main components:

  1. Profitabilty Index
  2. Productivity Index
  3. Profit Margin Index

CTA intends to publish further developments to this index on a regular basis, in order to monitor the economic signs, both domestically and globally, that will determine business performance going forward.

In addition to the Corporate Robustness Index, CTA has also developed a Macroeconomic Environment Index, constituted by the inflation rate, interest rate and exchange rate, with the goal of assessing the quality of the macroeconomic environment within which the Mozambican enterprises are inserted. This index too, is intended to be regularly updated and published.

Also read: Mozambique: State collects more than €1.3B in H1

The study findings are as follows:

Impact of COVID-19 on business turnover

Regarding the impact of COVID-19 on turnover, the results of the study suggest that, due to the effects of the COVID-19 pandemic, the level of business activity decreased by about 65% in the first half of 2020, which culminated in the reduction of the Corporate Robustness Index by around 49%, from 0.51 in January to 0.26 in June. The Hospitality and Tourism sector is the most affected, with a retraction in the level of activity of more than 75%. Due to these impacts, in the first half of the year, the business sector as a whole recorded an estimated turnover loss of approximately 31 billion Meticais, corresponding to US$453M.

Based on this information, and considering the evolution of the pandemic and the economic dynamics projected for the second half of the year, it is estimated that the volume of turnover losses in the Mozambican business sector, for the year of 2020, may amount to approximately US$951M, corresponding to about 7% of GDP.

However, a modest recovery in business activity is expected in the second half of the year due to the gradual reopening of some global economies and the relaxation of some restrictions in the context of measures of the State of Emergency.

In this context, a gradual recovery of the Corporate Robustness Index is expected in the second half of the year, which may rise from 0.26 in June to 0.34 in December. However, it is important to note that this recovery will be strongly dependent on the evolution of the pandemic in South Africa, which is the country’s main trading partner, as well as on the continuous easing of restrictions on business activity, within the scope of prevention measures.

Impact of COVID-19 on employment

The consequences of the pandemic on the business sector were also reflected in the labour market, due to the significant reduction in the volume of revenues that affected the cashflow of companies and their ability to support production costs, which include the payment of wages; in this scenario, several companies opted to suspend employment contracts.

According to the data obtained by CTA, by the end of 2020’s first half, around 30 thousand employment contracts had been suspended and, considering this pace of evolution, it is estimated that by the end of the year this number will increase to 63 thousand, corresponding to approximately 11% of the labour force employed in the private sector.

The continuous growth in the number of jobs suspended will owe itself mainly to the sectoral perspectives, which will characterize the second half of the year. In sectorial terms, the Hospitality and Tourism sector has the highest number of suspended jobs, around 40% of the total, and it is expected that in this sector, the number of suspended jobs will continue to increase.

However, it is expected that in the next six months, positive signs may emerge in the catering subsector, given the gradual opening and easing of restrictions, within the framework of the State of Emergency. The same no longer applies to the accommodation area and travel agencies. The experience of Europe, which already has a restriction relief plan in place, opening the border is one of the last stages of deconfinement. This has implications for travel agencies and accommodation establishments since, in Mozambique, the main demand is mainly from foreign travellers.

As a result, it is projected that, due to these factors, the number of jobs suspended in the accommodation sub-sector – in essence Hospitality as a whole – will continue to increase throughout the second half of the year.

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Prospects for economic growth

Due to the adverse situation generated by the effects of COVID-19, the growth of the Mozambican economy in 2020 may slow down compared to the previous year (2019), when the economy grew by 2.2%.

As the estimates suggest, the growth rate may rise to 1.1%, in an optimistic scenario, and -0.5%, in a pessimistic scenario. The pessimistic scenario is currently considered the most likely, and is based on the structural rigidity of the Mozambican economy (which makes it difficult for the economy to recover from a short-term shock), the maintenance of the State of Emergency in the second half of the year (which implies restrictions on business activity) and the maintenance of entry and exit restrictions on Mozambique’s main trading partners, such as South Africa, which represents about 30% of the country’s foreign trade volume.

Therefore, based on these fundamentals, CTA believes that the pessimistic scenario, which predicts a negative growth rate of -0.5%, will be the prevailing one. However, depending on the approach taken to the State of Emergency measures for the business sector in the second half of the year and the evolution of the pandemic in the South African economy, the growth rate may follow a gradual recovery course and may reverse the expected trend, which is that of negative growth.

The influence that the evolution of the pandemic in the South African economy has on the dynamics that the Mozambican economy may or may not influence the second half of the year, and this influence is not reflected in the number presented here. Bearing in mind that trade between Mozambique and South Africa represents about 30% of the volume of international trade in Mozambique, the level of restrictions that the South African Government will impose in the second semester may dictate the pace of recovery of the Mozambican economy in the second half of the year.

In addition, the reopening of Mozambique’s commercial partner economies and the return of air travels may generate pressure on the Metical, leading it to experience some depreciation against the main currencies, particularly the US dollar and the South African Rand.

Also read: Mozambique: Deflation for the third consecutive month

Measures to mitigate the effects of COVID-19

In response to the impacts of COVID-19, the Government of Mozambique has adopted a set of fiscal, labour, financial and customs measures with a view to stimulating economic activity.

However, despite the best intentions with the implementation of these measures, it appears that in large part these measures did not generate the expected impact on the business sector. Therefore, to improve this scenario, CTA proposes the adoption of a new framework of measures that effectively responds to the challenges that this pandemic imposes on the business sector and the economy in general. These measures should consider, first of all, the definition of prevention rules and procedures that will guide the continuous functioning of the business sector in the context of COVID-19 and the correction of distortions caused by the COVID-19 pandemic in the business environment.

On the other hand, it is necessary to reformulate the measures previously adopted, making them comprehensive and effective. Here, worth mentioning is the measure referring to the postponement of payments on account and specials on behalf of the IRPC, as well as the measure referring to the reduction of the cost of electricity, is highlighted, in addition to the effective implementation of the measure referring to the compensation of VAT credits.

Additional measures include specific incentives for the Hospitality and Tourism sector, as they are the most affected, such as the Reopening of Tourist Attraction areas and the reduction of the VAT rate to 8.5% in the accommodation sector. CTA also proposes to pay the arrears of the State through its securitization, through the adaptation of the system of moratoriums on bank instalments, and the strengthening of credit lines.

Regarding the moratoriums on the payment of bank instalments, CTA notes that, in reaction to the measure adopted by the Bank of Mozambique that removes the obligation to set up provisions for restructuring credits from the economic agents affected by COVID-19, several commercial banks started the process of negotiating default payments on bank instalments with affected companies, which is very much welcomed.

However, it may be of concern that, in the current model of default, which imposes the capitalization of deferred instalments, although companies may benefit from a treasury relief, estimated at 2.3 billion Meticais in the first 6 months, they may remain under stress in the subsequent 6 months, due to the additional burden that results from the capitalization of the deferred amounts.

With that, companies will pay up to 2.4 billion Meticais in the next 6 months, meaning an additional cost of 100 million Meticais. This scenario suggests that the effective interest rate will rise from an average of 19.29% to approximately 20.1% over this period.

Therefore, in order to minimize this cost, the intervention of the government and cooperation partners is necessary through a financial support measure that will eliminate the capitalization process of the deferred benefits.
In terms of financing, what stands out is the role of cooperation partners in supporting the creation of credit lines that can respond to the financing needs of the business sector, estimated at US$508M. This is considering that the funds made available through credit lines introduced by the Government, incorporate only 5% of the total financing needs of the Mozambican business sector.

All the measures announced here must be implemented through a comprehensive and agglutinating instrument, structured in the form of a “Post-COVID-19 Economic Recovery Program”. This program should be based on two main vectors, namely (i) adaptation and creation of resilience and (ii) economic recovery.

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