by levy-sergio mutemba

 

  • Trade data in the first half of the year signal upward pressure to the Mozambican currency

 

  • But inflation and public debt remain challenging

 

  • USD has its own intrinsic downward pressures in a tense geopolitical environment

Banco de Moçambique

Banco de Moçambique
Taken by Nuno Rosario from MAPUTO, Mozambique/Wikimedia Commons

Where is the metical (MZM) heading from now on? The Mozambican currency regained 21% at MZM 61.30 since its historic low of MZM 78 against the US dollar in October 2016. Year-to-date the dollar lost a little more than 14% (as of 8 September 2017). Several positive factors suggest that the Southern African currency may add gains in a relatively short term.

USD/MZM Performance

USD-MZM 5-Year

Source: Trading Economics

Indeed, though still below its ten-year average, GDP growth remains positive, reaching an annual rate of 3% in the second quarter of 2017, following an increase of 2.9% a month earlier. The country also registered a positive goods balance in the last quarter of 2016 for the first time in over two decades. As a result, the current account deficit decreased by 30% to stood at 38% of GDP at the end of 2016 from 40% in 2015.

Mozambique's GDP

Source: Federal Reserve Bank of St. Louis

Based on the latest official data, the total current deficits registered in the first semester now represent only 39% of current deficits registered during the same period last year. This helped the economy improve its imports coverage ratio to 6.1 months (4.3 months when we include megaprojects).

Much of the observed growth in the recent quarters has indeed been fueled by the primary sector, whose production increased 9.5% in the last quarter ended in June 2017. The mineral extraction segment alone grew more than 50% during the last three months.

At the end of the first semester the Mozambican extractive industry had already exported 75% (USD 1.19 billion) of what it had exported (USD 1.29 billion) during the entire preceding year. This suggests, all things being equal, that 2017 may outperform 2016 by a significant margin.

Extractive Exports 2011-2016

Source: Instituto Nacional de Estatísticas (INE)/National Statistics Institute

Mineral coal exports, the most significant item within the extractive segment in terms of value, increased 119% at USD 822 million in the first six months of the year, followed by natural gas (USD 157 million). Overall, megaprojects (USD 1.83 billion) already account for 75% of total exports so far. Within this sector, several recent announcements have tended to give positive signals as to its underlying dynamics.

Last Tuesday the Mozambican Council of Ministers have approved the ENI-led consortium’s sale and purchase agreement enabling the US-based giant ExxonMobil to acquire a 25% indirect stake in the coral gas field Area 4 Block, in the Rovuma Basin, offshore Mozambique, that the Italian company operates.

In May this year ExxonMobil and Russian Rosneft, which obtained an exploration license in October 2015, announced their plans to start oil prospection this year in three blocks of the Mozambican sea. Another announcement is ENI’s and US-based firm Anadarko’s, who signed an agreement last month with the Mozambique government to build two liquefied natural gas terminals in the northern province of Cabo Delgado.

Mineral activities have not been idle either. Aluminum bars from the Mozal smelter, which account for close to 30% of Mozambique’s total exports and which consumes about 45% of the total electricity that the country produces, have increased somewhat in the first semester to reach USD 557.3 million or 66% of last year’s total aluminum exports.

Manufacturing Industry (in USD millions) 2011 2012 2013 2014 2015 2016 S1 2017
Aluminium Bars 1357.1 1091.7 1063.2 1052.3 908.3 843.0 557.3
Aluminium Cables 0.0 0.0 0.0 0.0 14.0 44.0 34.4
Sugar 87.9 154.4 155.7 81.3 137.3 46.1 0.2
Cashew 28.3 15.1 16.1 9.9 9.8 13.4 6.0
Sunflower oil 3.8 6.2 13.3 26.8 17.2 12.4 6.8
Alcoholic Beverages and Vinegar 0.5 0.7 1.9 7.7 20.5 16.0 5.7
Wigs and similar products 9.1 5.5 16.4 25.9 17.9 15.4 1.8
Source: Instituto Nacional de Estatísticas (INE)/National Statistics Institute

“Increased export earnings due to recovering commodity prices are key to this trend”, explains the World Bank in its Mozambique Economic Update published in July. The international organism adds that reduced liquidity resulting from an increase in the reserve requirement has also lessened supply of the metical.

Yet, there are also non negligible downside risks to the appreciation of the MZM. Inflation remains high indeed, though it has stabilized from a record high of 25% at the end of last year to about 16% today, according to the July’s inflation report published by the National Institute of Statistics (INE) in Maputo. Moreover, the financial scandal that revealed hidden public debt pushed external debt to around 110-120% of GDP.

However, if the MZM doesn’t appreciate soon against the dollar, it is the dollar which may lose in value against the Mozambican currency. The USD has, indeed, its own intrinsic downward forces. The dollar index, which measures the performance of the US currency against a basket of six hard currencies, lost 3.29% in the last 12 months.

USD Index vs Major Currencies - 2016-2017

Source: Federal Reserve Bank of St. Louis

It is down 11% since the end of December 2016. Despite the recent rise in geopolitical tensions between the United States and North Korea, which should have prompted global investors to seek for safe havens such as the USD, the latter seems to have lost its role as a refuge or hedge against geopolitical risks.

“What is important for FX markets is that the USD is no longer acting as a currency of choice for a safe haven”, writes forex analysts from Morgan Stanley in their last daily FX Morning. “Instead the USD is weakening in line with lower Treasury yields.”

The American investment bank made a sensitivity analysis of the Fed’s broad USD index (which includes G10 currencies as well as those of emerging markets) to the 10-Year Treasury Constant Maturity Minus the 2-Year Treasury Constant Maturity (US2s10s spread) and the US 10-Year yield, where they find that the USD has recently become the most sensitive currency to moves in the bond market in the whole time history back to the late 1990s. “EM currencies and the Australian dollar (AUD) should do well in this environment”, says Morgan Stanley.

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