Covid-19´s Impact on China and Other Trading Partners to Hurt Mozambique´s Growth

 

The Mozambican government’s real GDP growth projection of 2.2% for this year may prove to be “somewhat optimistic”, according to Eaglestone Securities, considering the uncertainties surrounding the impact that Covid-19 could ultimately have on the local economy. These include the economic performance of China, which has become a major Mozambican trading partner.

 

In a new report on the Mozambican economy, Eaglestone Securities says the economies of country’s main trading partners (South Africa, India, China and the Euro area) “are all being severely affected by the pandemic” while the prices of its main exports (from the mining sector) “continue to plummet, putting additional pressure on Mozambique’s already fragile external accounts”.

 

Additionally, the announcement by US oil major ExxonMobil that it was postponing (without deadline) the final investment decision on its LNG project in the Rovuma Basin “due to the latest crash in energy prices is likely to affect economic activity while the escalation of military tensions in the northern and central parts of the country could also limit its economic growth trajectory in 2020”, adds the report.

 

The Government´s 2020 budget proposal assumes a budget deficit of 7.7% of GDP (vs. a reported 2.1% of GDP in the previous year), showing, according to the report, “that the fiscal consolidation efforts put in place in recent years by the local authorities may be on hold for the time being”. The country is expected to see the return of direct budget support in 2020 after this type of financial assistance was interrupted in the last three years (2017-19) following the revelation of previously undisclosed debts in April 2016.

 

Now, the IMF and the World Bank will inject MZM 21,038 million in direct financial support to the 2020 budget to help mitigate the impact of Covid-19 in the country. The government will also count on an additional MZM 19,985 million in donations and MZM 25,983 million in multilateral and bilateral loans for specific projects included in the  budget.

 

Mozambique is part of the group of 25 low-income countries, including 19 in Africa, which is going to benefit from six months of debt service relief (extendable up to two years) recently announced by the IMF. Private creditors also provided a debt moratorium at least until the end of the year.

 

For Eaglestone Securities, “these are positive news, as this debt service relief will provide a short-term safety net and allow the local authorities to allocate much-needed funds to combat several areas of the economy more affected by Covid-19. However, these challenging times that Mozambique is also facing must not put in jeopardy the progress that the country has recently made in restoring macroeconomic stability and, more importantly, they must not deviate attentions from the need to bring public debt to more sustainable levels over the medium-term”.

 

In its assessment of the Covid-19 impact, Mozambique´s central bank says that the fact that Mozambique has a relative exposure to trade with China stands out in terms of direct impacts to the economy.  

 

Photo of Maputo, Mozambique

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