Corruption, poverty, coup risks and ethnic tensions often lead to unrest
The Sub-Saharan country regularly experiences unrest, with road blockades and property damage. Corruption, social division, poverty and tensions between tribes are deeply entrenched in society and frequently provoke upheaval. About two thirds of the population are Arab Moors and one third are ethnic black African inhabitants. The Moors are divided into the so-called white Moor elite (the Beydan), which is the dominant group, and the black Moors (the Haratin), historically the slaves of the Beydan. In fact, despite the official prohibition of slavery, many are still believed to be affected by it in practice, which forms a dormant risk for civil unrest. In addition, coup risks are relatively high as the desert nation has a history of frequent coups and coup attempts. The first president after independence was ousted in 1978, while the latest coup was staged in 2008 and brought Mohamed Ould Abdel Aziz to power. Mohamed Ould Cheikh Ahmed Ghazouani’s victory in the peaceful presidential elections of June 2019 marked the end of the political dominance of Aziz after two terms in power. President Ghazouani will likely consolidate his autocratic power by pursuing a patronage and promotion strategy towards the military similar to that of Aziz. Nevertheless, an attempt by Aziz to divide the military in order to mount a coup enabling him to return to power is possible and poses another risk of unrest.
Heavy reliance on commodity exports translates in large economic growth fluctuations
Mauritania’s heavy reliance on both commodity exports and the agriculture sector, which faces serious drought risks, produces fluctuations in the rate of economic growth. During the years of high commodity prices (2010–2014), Mauritania’s real GDP growth averaged around an adequate 5.5%. When commodity prices decreased thereafter (2015–2018), real GDP growth fell on average to a poor 2%. Nonetheless, as of 2019 the economy is expected to have strongly rebounded, with a real GDP growth of 6.9% driven by the expansion of the mining production. The upcoming development of a large offshore gas field, upgrade works in some gold and iron ore mines and strong domestic demand are expected to keep real GDP growth above 6% in the coming years. That being said, these growth numbers might be affected by lower commodity prices, a global slowdown (fuelled by the covid-19 virus or the trade war between China and the US) and security threats in the Sahel. Furthermore, the profound lack of skilled workers (among a partly nomad population), structural shortages in electricity supply, limited access to credit and an opaque legal system will also continue to pose risks for the economic activity.
Oil and metal prices dominate the current account balance while the prospect of gas can be a game changer
Historically, the current account balance has always been in deficit. However, between 2012 and 2019 the deficit was very wide, at around -20% of GDP on average. On the export side, the country leans on extraction of natural resources ¬– iron ore in particular, as well as copper and gold (together accounting for about half of export revenues) ¬– and on food (especially on fish), the latter accounting for 40% of current account receipts. On the import side, because 80% of Mauritania’s land is desert, the country is dependent on food imports for three quarters of its food requirements. Moreover, as oil production turned out to be rather disappointing, the country is a significant net importer of oil and gas. Consequently, the high oil prices in 2011¬–2014 led to a surge in the current account payments. And although the oil price shock of mid-2014 led to a lower import bill, it didn’t translate into a more manageable current account deficit as the international metal prices dropped as well, leading to lower current account receipts. Nevertheless, since 2015 the current account deficit has gradually been declining although the deficit has remained elevated (an estimated -11.4% of GDP at the end of 2019). In 2020, the current account deficit is expected to widen to about 20% of GDP. The development of the offshore gas field shared with Senegal – one of the largest in Africa – will increase the import bill due to high capital imports. As of 2022, gas exports from this field are expected to narrow the current account deficit significantly to about -6% of GDP, if managed and developed in a sound and responsible manner. That being said, oil prices, commodity prices, serious droughts, delays in production of the gas field, unrest and a slowdown in the economic growth of China pose serious downside risks for these projections.
FDI as main source of financing the current account balance
The current account balance has been largely financed by FDI (a more stable source of financing) and, to a lesser extent, by external debt loans (rising insolvency risks). Following the drop in Chinese demand for Mauritanian iron ore in 2014, mining investments were cancelled and FDI inflows plunged. As a result, external buffers (built during the booming years) were tapped to support the economy. Yet, these buffers proved insufficient to deal with a lasting shock. Henceforth, the financial account further worsened and left financing shortfalls on the external balance of payment in 2014, triggering a fast erosion of foreign exchange reserves. Moreover, since the debt relief in 2006, the gross external debt has increased to an unsustainable level. On the upside, potential passive Kuwaiti debt relief can put the external debt on a more sustainable footing. Nonetheless, the debt relief has been pending since 2011. Additionally, since 2017, FDI inflows have been recovering, though they did not reach the pre-2014 levels. On the downside, as development aid is a very important source of financing for the country, civil unrest can lead to sanctions or cuts in aid.
Rising foreign exchange reserves but still rather low for a not freely floating currency
Mauritania has a history of foreign exchange controls and reserves shortages (before 1998, as well as a near depletion in 2004–05) but has made obvious progress over the past years. During the commodity bonanza, reserves were mainly bolstered by high FDI inflows and by higher fishing license proceeds. And although foreign exchange reserves decreased significantly in 2014, the foreign exchange reserves have been slowly recovering ever since. As a result, foreign exchange reserves rose in the past years and stand at 3 months of import cover in February 2020. Though in general this is an adequate level, as the currency of Mauritania, the ouguiya, is de facto not freely floating, foreign exchange shortages might still appear.
Weak public finances are being tackled under an IMF programme
Public finances are weak. The budget deficit has deteriorated since 2014 and has led the public debt peak to a relatively high level of 83% of GDP at the end of 2018. That being said, since 2017 the government has been enacting strong fiscal consolidation under an IMF programme. Since then, the overall fiscal balance has been in positive territory. In combination with forecasted higher commodity revenues and strong real GDP growth, the public debt ratios are expected to decrease in the coming years. Nonetheless, non-transparent and inefficient state-owned enterprises continue to be a burden for the national budget. Furthermore, the public investment programme (closing the large infrastructure gap) can lead to fiscal slippages or non-concessional borrowing.
Risk classifications remain unchanged for now
For MLT political risk, Credendo classifies Mauritania in category 7/7. This rating is largely explained by wide current account deficits, low economic diversification, moderate political risk and high external debt. The risk outlook depends on the evolution of the gross public external debt and current account balance. For ST political risk, Credendo classifies Mauritania in category 5/7. This rating is largely explained by the wide current account deficit, a history of payment arrears and the inadequate level of foreign exchange reserves for a de facto not freely floating currency. The positive outlook depends on the improvement of the payment arrears.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com