On 11 September, the Council of Ministers approved the Economic and Social Plan as well as the national budget bill for 2019, which are due to be sent to parliament for discussion and approval. The documents estimate economic growth at 4.7%, inflation at 6.5%, a deficit of 7.8% and sufficient international reserves to cover six months of imports.
According to the Council of Ministers’ spokesperson, Deputy Minister of Mineral Resources and Energy Augusto Fernando, the documents project revenues of 244bn meticais ($4bn), around 22bn meticais ($360mn) more than expected for 2018. They also foresee 324bn meticais ($5.3bn) in public expenditure, factoring in a rise equal to the expected increase in revenues. The expenditures include 6bn meticais ($98mn) for the presidential, parliamentary and provincial elections scheduled for October 2019. Fernando added that the deficit is projected to stand at 80bn meticais ($1.4bn) and that it would be funded by domestic sources of financing – i.e., treasury bonds – as well as foreign grants.
The government has focused on domestic debt to finance a budget deficit that has increased by 15% between 2016 and 2018. Domestic financing already accounts for 12.1% of GDP and 46% of the deficit – with the remaining 54% financed by foreign aid flows into public projects. Tellingly, in Q1 2018, the public deficit doubled from the same period in 2017, mostly driven by domestic debt servicing.
Fernando’s statement on foreign grants is noteworthy, as traditional donors ceased to provide direct budget support after the undisclosed state-backed debts came to light. However, an eventual agreement with bondholders, coupled with efforts to implement reforms and continue a productive dialogue with Renamo, could work out favorably for the government’s finances.
In July, Mozambican media announced that the EU had pledged a $400mn financial package to finance projects, drawing on funds that had been suspended in 2016. That same month, the African Development Bank (AfDB) approved a $22mn financial package and converted it into a donation, signaling that the organization has taken into consideration the need to address Mozambique’s debt burden. Moreover, on 14 September, state media reported that Economy and Finance Minister Adriano Maleiane plans to travel to China to assess financing conditions, with the condition of avoiding further indebtedness. Maleiane added that the government aims to establish “an investor relationship” in China, rather than take out new loans.
In our view, the government will likely continue to focus on treasury bonds. However, this would be a challenge, as demand has been unstable, and the oversupply of treasury bonds is crowding out private lending. And although authorities will likely turn their attention to foreign financing facilities, potential external shocks and a failure to reach an agreement with bondholders could negatively impact such a strategy.
Therefore, we expect the government to weigh its options and seek to safeguard its ability to finance key infrastructure projects as well as its stakes in natural gas ventures. The government is very unlikely to increase the tax burden on investors and operators in the extractive sector, given its importance for the Mozambican economy.
Notably, failure to secure revenues to finance the deficit could lead to public sector salaries going unpaid and higher prices for the use of public services and infrastructure. Indeed, when announcing the government approval of both documents, Fernando highlighted plans to increase tolls on Mozambique’s main road bridges. For instance, the bridge over the Limpopo River at Xai-Xai, Gaza province, will undergo a 150% price increase. This context raises the risks of protests and strikes in the coming year, especially in the run-up to the October 2019 general elections.
Nevertheless, we assess that negotiations with bondholders, which Prime Minister Carlos Agostinho do Rosario said could be concluded by the end of 2018, and with the IMF will be key to successfully implementing this proposed budget. In turn, that would contribute to Mozambique’s economic and financial outlook, as well as temper the risks of civil unrest.