Whilst economic conditions are gradually improving in Mozambique, the country’s sovereign creditworthiness remains weak. The country’s debt burden is the highest in Sub-Saharan Africa and exchange rate pressures continue to pose downside risks. Despite growing terrorism risks in the northern Cabo Delgado province, oil and gas assets with adequate security are unlikely to be directly affected.
Mozambique faces a nascent threat from Islamist militant groups, with risks concentrated in Cabo Delgado province in the north of the country. In October 2017, approximately 30 unidentified gunmen launched attacks on 3 police stations in Mocímboa da Praia. The group stole 2 AK-series assault rifles and killed 2 police officers. Local reports indicated that the attackers had links to Somaliabased group al-Shabaab, although this has not been confirmed. However, there will likely be an uptick in attacks in the 12-month outlook, as Islamist groups encourage the disaffected Muslim population in Cabo Delgado to participate in attacks.
In an indication of the changing risk environment, there have been four further attacks since the October 2017 incident. Onshore oil and gas assetswith adequate security measures are unlikely to be directly affected, although Western commercial assets will remain aspirational targets. The risk of civil war in Mozambique has fallen since May 2017, when an indefinite ceasefire was announced by opposition party-cum-rebel group Resistência Nacional Moçambicana (Renamo). However, the sudden death in May 2018 of the Renamo leader, Afonso Dhlakama, will raise near-term uncertainty over the future of peace negotiations with the government.
Renamo’s interim leader, Ossufo Momade, has asserted that the group will continue with peace negotiations. However, if Renamo fails to unify around a single candidate to replace Dhlakama, a protracted leadership contest could delay the signing of a final deal. If the negotiations fail, Renamo would likely restart small arms attacks on security forces and road traffic on the EN1 road, potentially generating project delays in the oil and gas sector.
Sovereign credit risks in Mozambique remain elevated. In April 2016, the revelation that the government held an additional USD 1.4 billion in public sector debt led the International Monetary Fund (IMF) to suspend financial support, and donor assistance is unlikely to restart in the near future. Moreover, in January 2017, Mozambique failed to honour a USD 59.8 million interest payment on a 2023 bond, before missing a 15- day grace period. The country’s debt burden was estimated at 113.1% of GDP in 2017, with the majority of debt denominated in foreign currency.
This exposes Mozambique to significant exchange rate risks. Whilst the metical is forecasted to stabilise in the 12-month outlook, it is expected to depreciate against the dollar by an annual average of 3.3% in the period to 2021, further straining the government’s position. In spite of persistently elevated sovereign credit risks, there are signs that economic risks are moderating in Mozambique. Inflation has eased in recent months, falling to 3.8% in January 2018 from 20.6% 12 months earlier. This will help to drive private consumption, whilst greater currency stability will support foreign investment in liquefied natural gas (LNG). However, real GDP growth will remain below historical averages, with a rate of 3.6% forecasted in 2018.
Mozambique is emerging as a major player in the liquefied natural gas (LNG) sector, following the discovery of extensive natural gas in the Rovuma basin in 2010. Confidence in the country’s potential as an investment destination fell following debt revelations in 2016, yet interest will likely strengthen in the 12-month outlook. ExxonMobil purchased a 25% stake in ENI’s offshore interests in March 2017, an indicator of renewed confidence in Mozambique’s LNG sector.
Moreover, a final investment decision (FID) on ENI’s USD 8 billion floating LNG facility at the Coral field was reached in June 2017. Gas production is slated to begin in 2022, with ENI securing a 20-year purchase contract with BP. The government is keen to attract foreign investment in LNG projects, given a lack of domestic expertise in the sector, and this will mitigate the risk of adverse legal and regulatory action.
Mozambique’s persistently weak debt position will continue to generate uncertainty around the government’s ability to participate in project financing. The debt situation could also mean that the government looks to expand its stake in the nascent hydrocarbon sector, as it has done in previous years. However, any future regulatory changes that are introduced are unlikely to apply retroactively to existing concession agreements.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Argentina, Iran, Armenia and Côte d'Ivoire all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org.
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