Event

On 15 March, Cyclone Idai struck the central region of Mozambique before hitting Zimbabwe and Malawi. An estimated 90% of Beira, Mozambique’s second-largest port city, is said to be damaged or destroyed. Transportation, electricity and communication infrastructure got severely damaged, while following floods destroyed thousands of hectares of crops. The confirmed death toll in Mozambique reaches more than 600, although actual figures are undoubtedly much higher. About 1.85 million people in Mozambique are affected by the disaster. International support is getting into gear to stem significant additional health risks, including the spread of malaria, cholera and other water-borne diseases.

Impact

This catastrophe has exacerbated the country’s economic hardship it is experiencing since a hidden debt scandal erupted in 2016, triggering an economic crisis and a government default. The disclosure of large-scale fraud and bribery concerning USD 1.4 billion government loans provided by Credit Suisse and VTB prompted the IMF and bilateral donors to freeze their funds. Access to financial markets was cut off after the government defaulted on all its external commercial debts. During the crisis, liquidity got squeezed, the local currency lost more than 60% of its value against the USD and real GDP growth plunged from 7.4% in 2014 to 3.3% in 2018. In fact, the subsequent legal and investment uncertainty constrained economic recovery and financial provision. More recently, criminal charges were made against several highly placed government figures and former Credit Suisse executives, holding them responsible for contracting these loans. Moreover, discussions between the government and the private creditors are ongoing to restructure Mozambique’s Eurobond and these hidden loans.

Mozambique discovered large natural gas reserves off its northern coast in 2012 that could transform the country into the world’s 4th largest LNG producer. After years of delays due to institutional, legal and political uncertainties, the prospective LNG investments are nearing a final investment decision. However, concerns over violent Islamist-inspired attacks in the region and reservations about the global LNG market and prices, raise doubts about these mega investments’ returns. Large investment imports are leading to outsized current account deficits while revenues will only come on stream as of 2023 at the earliest. Despite great foreign direct investment (FDI) inflows, financing shortfalls on the balance of payments accumulate and put pressure on Mozambique’s liquidity position. Following the disclosure of the hidden debt, Mozambique’s external debt burden proved unsustainable with the external debt to GDP ratio reaching more than 100% in 2018 and projected to increase further. Profound debt rescheduling seems essential for Mozambique to re-establish a durable debt trajectory. Accordingly, the risk of non-payment was considered very high already before Cyclone Idai struck. Hence, for the time being, Credendo will continue to classify Mozambique’s short-term and medium- to long-term political risk classification in the highest category 7. Furthermore, climate shocks are being considered an increasingly important risk factor for Mozambique and its neighbouring countries. The UN stated that these ‘turbocharged storms’ in the southern hemisphere are becoming more frequent, more severe and more widespread.

As the destruction of Idai severely impacted crucial economic sectors, GDP growth projections are expected to be negatively impacted. Also, the devastation of newly constructed infrastructure will have a longer-term impact. The adverse effect on food availability is likely to push up inflation, while emergency spending and reconstruction needs are set to pressurise the already tight government budget. Consequently, the need for financial support and emergency aid is great. Aggravated pressure on the balance of payments and needs for emergency assistance could finally incite a deal with the IMF on a financial support programme after almost two years of strained relations. The impact of the cyclone has made restored collaboration with international donors ever more urgent. However, strengthening accountability, transparency and economic management will be vital for recovering international financial relations in a more structural way. On the political side, the October 2019 general elections could be affected by the fallout from Idai. In fact, hostility towards the ruling FRELIMO government could grow due to the lacking warning mechanism and slow emergency response, in addition to the damaging corruption scandals.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com