Mozambique: Waiting For Gas

Courtesy of The Economist, a report on Mozambique’s economic malaise:

Look at the state of this school,” says Manuel Jaime. It is not a pretty sight: cracked window panes, pockmarked floors and walls etched with graffiti. For this resident of Beira, in central Mozambique, the condition of Amilcar Cabral School, which doubled as a polling station during local elections on October 10th, typifies the state of the country. He lists teachers who do not show up, hospitals without medicine and a lack of public transport. Sighing, he adds: “I’m 43, and I’ve never had a formal job.”

A few years ago Mozambique was perky. With 30m people and a coastline longer than that of the western United States, the country was feted by aid agencies and plucky investors. A peace deal signed in 1992, at the end of a 15-year civil war, had more or less held. From 1995 to 2015 gdp had grown on average by more than 8% a year. Mozambique was one of the world’s ten fastest-growing economies.

Its momentum came to a halt in 2016, when it emerged that three companies controlled by the intelligence service had hidden state-backed loans worth $2bn. Donors and the imf suspended financial aid and Mozambique defaulted on its debt. Negotiations with bondholders are still going on. Growth fell to 3.8% in 2016 and 2017, barely enough to keep pace with an expanding population.

Despite a surge in the production of coal, which makes up half of Mozambique’s exports, the damage of the hidden-debt crisis endures. Total public debt as a share of gdp, at 112%, is Africa’s fourth-highest. Mozambique remains one of the world’s poorest countries.

Yet many still believe salvation is on the horizon. In 2010 huge reserves of natural gas were discovered in the Rovuma basin off the northern coast. Some predict that Mozambique will become one of the world’s top producers of liquefied natural gas—an African Qatar. Two large projects off the northern coast are due to start production in 2023 and 2024. “We’re waiting on the gas boom,” says a consultant. “Everyone is expecting miracles.”

That is dangerous. A simmering insurgency in the north may delay production. But even if gas starts flowing in 2023, it will take another decade for it to reach “transformational levels”, reckons Renaissance Capital, a bank. And Mozambique may well suffer a resource curse. Transparency International, a watchdog, estimates that corruption cost the country nearly $5bn between 2002 and 2014.

Nowadays frelimo, a former guerrilla movement that has ruled since independence from Portugal in 1975, is a mafia-like party with links to criminal enterprises. Other African countries have a “big man president”, says Edson Cortez of the Centre for Public Integrity, an ngo. “We have a big party.” Gas will merely bring “more frelimo millionaires”, says a Beira-based businessman (himself a frelimo member).

At least the dash for gas may encourage frelimo to nail down a peace deal with its long-running foe, renamo, before production begins. On October 4th Filipe Nyusi, the president, announced that Javier António Perez, an Argentine general who supervised the disarmament of Colombia’s farcguerrillas, would co-ordinate demilitarisation. But progress will be slow until renamo appoints a full-time successor to Afonso Dhlakama, its leader for almost 40 years, who died in May.

The conduct of the recent local polls will not have helped. In the first vote since the debt crisis, renamo had its best showing. Even allowing for chicanery, it won 39% of the vote to frelimo’s 52%. In several cities frelimo won by suspiciously narrow margins of less than 1%. A clutch of journalists and opposition activists have gone into hiding following death threats in what Amnesty International calls “a post-election witch-hunt”. All of which bodes ill for the general election next October.

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.