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.

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PRESIDENT GUEBUZA CONCERNED ABOUT ECONOMIC GROWTH
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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.

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2008 GDP GROWTH 6.5, INFLATION 10.3 PERCENT
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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


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BANKS INSULATED AND RISK-AVERSE
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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.

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ECONOMISTS DESCRIBE MOZ ECONOMY AS INSULATED...
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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.

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...BUT EVERYDAY WORKERS TAKE A MORE NEGATIVE VIEW
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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.

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MOZAL, A POTENTIAL ACHILLES HEEL
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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.

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NEW LABOR LAW MAKING INVESTMENT MORE DIFFICULT
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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.

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COMMENT: PRICES, ALUMINUM, LABOR LAW
TO EFFECT GROWTH
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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