PRESIDENT CONCERNED ABOUT MOZAMBIQUE'S ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 MAPUTO 000381 SIPDIS E.O. 12958: DECL: 03/17/2019 TAGS: PREL PGOV EFIN ECON MZ SUBJECT: PRESIDENT CONCERNED ABOUT MOZAMBIQUE'S ECONOMY REF: A. MAPUTO 318 ¶B. 08 STATE 134459 ¶C. 08 STATE 125609 ¶D. 08 MAPUTO 126 Classified By: CHARGE TODD CHAPMAN FOR REASONS 1.4 (B AND D) ¶1. (C) SUMMARY: On March 17, President Guebuza summoned the Charge to discuss the potential impact of the financial crisis on Mozambique, raising particular concerns about the effect of slowing economic growth on poverty reduction. Guebuza recently created a ministerial working group to discuss the financial crisis, and has questioned several other chiefs of missions in Maputo about the impact of the crisis on Mozambique. The President subtly raised concerns about the impact on foreign assistance flows to Mozambique, one of the most donor-dependent countries in the world. The Charge provided his impressions on the U.S. economy and the ongoing discussions about the U.S. budget, possible impact on aid flows, potential U.S. investment, and the need to accelerate economic reforms to improve Mozambique's chances to attract foreign investment. According to February 9 statements by the Central Bank, the Government of Mozambique (GRM) revised downwards its estimates for final 2008 GDP figures to 6.5 percent, well short of original estimates of 7 percent. The cost of imported food stocks and petroleum had a negative effect on economic growth over the last year. Despite the meltdown in international financial markets, Mozambique received $500 million in FDI through November, suggesting that investors are still interested in Mozambique. Central Bank Governor Ernesto Gove, Prime Minister Luisa Diogo, and other GRM economists had earlier stated that Mozambique is relatively well insulated from the financial crisis, but Guebuza does not share that optimistic view. END SUMMARY. -------------- -------------- PRESIDENT GUEBUZA CONCERNED ABOUT ECONOMIC GROWTH -------------- -------------- ¶2. (C) President Guebuza met with the Charge on March 17 to discuss the potential impact of the financial crisis on Mozambique, raising his concerns about the effect of slowing economic growth on poverty reduction. The Charge provided his impressions on the U.S. economy and the ongoing discussions about the U.S. budget, possible impact on aid flows, potential U.S. investment, and the need to accelerate economic reforms to improve Mozambique's chances to attract foreign investment. Guebuza recently created a ministerial working group to discuss the financial crisis, led by Finance Minister Manuel Chang, and recently called several other chiefs of missions in Maputo to his office individually to discuss the impact of the crisis on Mozambique. The President appeared concerned about the impact on foreign assistance flows to Mozambique, one of the most donor-dependent countries in the world. He also mentioned his preoccupation with slowing GDP growth and its potential effect on poverty reduction. While many in the Government of Mozambique (GRM),including the Central Bank Governor and Prime Minister have made bullish public statements touting Mozambique's expected continued growth, the President is clearly worried. -------------- 2008 GDP GROWTH 6.5, INFLATION 10.3 PERCENT -------------- ¶3. (SBU) Despite early predictions of very strong 7 percent GDP growth for 2008, the international financial crisis, particularly the price of fuel and food imports, have forced the GRM to revise downwards its estimates for 2008 GDP growth. In his end of year statement, Central Bank Governor Ernesto Gove told reporters that GDP growth would likely be closer to 6.2 percent, but maintained that Mozambique appears insulated from the financial crisis. On February 9, the Central Bank released its final 2008 GDP growth figure of 6.5 percent. Annual inflation was 10.3 percent based on a consumer price index in Maputo, missing the GRM's target of 5.7 percent. A Standard Bank official recently commented to poloff that inflation rates outside of the capital city are closer to 15 percent. Prime Minister Luisa Diogo explained that Mozambique spent $200 million more than expected to import 529,000 tons of petroleum products due to 2008 volatility in the international price of petroleum. According to a Council of Ministers statement, total exports through September 2008 were $1.95 million, and reserves were $1.6 million through December 2008, representing 4.5 months of import coverage. MAPUTO 00000381 002 OF 003 -------------- BANKS INSULATED AND RISK-AVERSE -------------- ¶4. (U) Credit markets in Mozambique explain some of the country's insulation from the financial crisis, with banks sparingly lending to the private sector without full or nearly full collateral at rates above 20 percent. International banks' prime lending rate is above 18 percent. Most banks in Mozambique have invested in government debt, taking advantage of relatively risk-free 14 percent interest rate for treasury bonds. The result is illiquidity in the country's credit markets. Both the Confederation of Business Associations (CTA) President Salimo Abdula and Prime Minister Diogo have called on the Central Bank to stop offering such attractive rates on treasury bonds in an effort to increase the liquidity of credit markets in Mozambique. -------------- -- ECONOMISTS DESCRIBE MOZ ECONOMY AS INSULATED... -------------- -- ¶5. (SBU) The GRM's overly-bullish outlook for continued export-led GDP growth in 2009 predicts an 8.9 percent increase in trade volumes. While the private sector is not as bullish, economists and bankers publicly describe Mozambique as relatively insulated from worldwide economic turbulence, but February 2008 riots over transportation and food price increases suggest that Mozambican consumers are extremely price sensitive. ¶6. (SBU) According to Professor Antonio Gomes Mota, Mozambique's banking system is well insulated, though he warns that a return to high petroleum prices could negatively effect growth in the next year. Others point to international credit markets and raise concerns that a scarcity of available credit may effect the development of "mega projects" and the flow of foreign investments which have driven recent economic growth. Already several mega projects have been postponed, though the GRM continues to announce new projects including a new $8 billion oil refinery to be built near Maputo by investor MozOil, which has ties to former-President Chissano. Nonetheless, if oil prices continue below $60 a barrel, they may delay costly petroleum exploration in northern Mozambique and downstream projects such as refineries, as well as plans to expand Mozambique's hydro projects. -------------- -------------- ...BUT EVERYDAY WORKERS TAKE A MORE NEGATIVE VIEW -------------- -------------- ¶7. (SBU) The GRM continues to make assurances about the state of the Mozambican economy, which is performing well relative to other economies; however, the effects of slowed growth are beginning to show. Middle-class Mozambicans in Maputo report more frequent public violence over money, with delinquent debtors beaten by angry creditors, for example. Merchants now regularly ask customers if they wish to purchase an item without an invoice; code for paying only the purchase price, not the 17 percent VAT. Prior to the downturn, "no invoice" sales occurred but were not the norm. In late February, an SMS circulated proposing that riders of public transportation protest fare-gouging by Maputo's ubiquitous "chapas." While no protests occurred, the SMS brought back memories of the instability manifested by the 8 February 2008 fare protests (Ref A and D),confirming that the average citizen is still very sensitive to prices. -------------- MOZAL, A POTENTIAL ACHILLES HEEL -------------- ¶8. (SBU) Much of Mozambique's economic growth rests on the price of aluminum, which dropped by 48 percent over the past year due to worldwide recessionary trends. The country's aluminum exports are from a single source, the MOZAL plant near Maputo with energy supplied from another single source, Cahora Bassa dam, via South African transmission lines. MOZAL accounted for 59 percent of Mozambique's 2008 exports and Cahora Bassa's electricity exports further accounted for 9.4 percent, together accounting for almost 70 percent of exports. ESKOM, the South African energy provider was forced to reduce its 900 megawatt power allotment to MOZAL by 10 percent in 2008 due to South African power constraints. As a result, in February MOZAL announced that it would lay-off 80 workers; an announcement which was immediately met by calls from Minister of Labor Maria Helena Taipo for a justification. The Minister publicly met with the fired MAPUTO 00000381 003 OF 003 Mozambican workers who claimed that they would be replaced by foreign workers. Taipo subsequently proclaimed that she had forbidden MOZAL from hiring additional foreign workers. On March 13, Taipo levied fines against MOZAL for "illegal redundancies," and for "preventing the exercise of trade union rights," further demanding that MOZAL pay double the severance package provided to the fired workers. -------------- - NEW LABOR LAW MAKING INVESTMENT MORE DIFFICULT -------------- - ¶9. (SBU) The Charge raised concerns over restrictions in a new December 2008 addition to the Labor Law with Guebuza on March 17 as he did with the Vice Minister of Foreign Affairs Henrique Banze in early March. The new regulations place caps on the number of non-Mozambican employees at 5-10 percent depending on the size of a company. As a result, companies investing in Mozambique that do not have a direct agreement with the GRM, as is the case for some mega projects, must abide by the new regulations and hire an approximately 90 percent Mozambican workforce despite a critical lack of human capacity in the country. As a result of the new regulations, private sector investors in Mozambique as well as donors, implementing partners are being faced with the denial of work permits for their foreign workers. Minister Taipo's involvement in the MOZAL case raises further concerns among investors. Some companies, such as Chiquita, have decided to headquarter their Mozambican operations across the border in South Africa in order to avoid labor regulations and allow for greater hiring and firing freedom. -------------- COMMENT: PRICES, ALUMINUM, LABOR LAW TO EFFECT GROWTH -------------- ¶10. (C) President Guebuza's meeting reveals a growing lack of confidence in the internal assessments of the financial crisis that he receives, particularly given the GRM's apparent unwillingness to deliver negative messages to their Commander in Chief. It appears that Guebuza is beginning to understand that the GRM's projections for economic growth are unrealistic, and that he needs to prepare for slower GDP growth and a reduction in FDI. While economists rightfully focus on food, energy, and credit prices as determinants of economic growth in 2009, few among the GRM and private sector are focusing on commodity prices for Mozambique's most significant export, aluminum, which accounted for 59 percent of 2008 exports, and has led Mozambique's recent mega project-driven economic growth. With the February MOZAL announcement that it would lay off nearly 10 percent of its workers, and the Minister of Labor's attempts to block the layoffs as well as assess fines to MOZAL in March, the GRM has begun to send protectionist messages that will scare off foreign investors, and potentially donors, both groups which the GRM desperately needs in order to maintain economic growth and fight poverty. Everyday citizens in Mozambique are also becoming more vocal about the economy, something that will concern Guebuza in an election year. Chapman