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Hot spots: Mozambique.

Mozambique is a former Portuguese colony where even today, two decades after the end of a 15-year-long civil war that claimed the lives of more than a million people, average income is not much more than USD 400 a year and over half of the 23-million population ekes out a living below a poverty line of 50 U.S. cents. Real gross domestic product (GDP) growth averaged 8% between 1996 and 2008, driven by reconstruction and development after the war and helped by debt relief, yet the state still depends on international donors for between 40%-45% of its budget and much of the country is still little more than a sprawl of small villages connected by rough dirt roads.

Now, though, Mozambique is on the brink of an amazing boom that could turn it into one of the wealthiest nations in Africa. The country's coal mining rush is one reason for this, as the region is endowed with one of the world's richest undeveloped coal reserves. Coal exports have already climbed from 1.5 million metric tons to more than 4 million tons annually. Production is forecast to reach 20 million tons by 2015. So far, Brazil's Vale is the only miner exporting coal, but Mozambique could be producing between 20-50 million tons per mine each year in the next decade, and investment in known coal projects is expected to bring USD 10 billion into the country over the next few years.

Billions more will be spent on infrastructure such as roads and railroads to transport the coal and make improvements to the port of Maputo. Even more important in making the nation the focus of unprecedented investor interest have been huge discoveries of natural gas off the northern coast. These could bring in another USD 70 billion in investments over the next few years. The biggest finds were by Andarko Petroleum and Cove, a small, Africa-focused oil and gas explorer that has just accepted a USD 2-billion bid from Royal Dutch Shell for its 8.5% stake in a big gas field, as well as the Italian energy giant ENI.

The two fields of Andarko and ENI combined could contain up to 60 trillion cubic feet of recoverable natural gas, nearly as much as Kuwait's entire reserves. They are expected to turn Mozambique into a world-class exporter of liquefied natural gas (LNG), with sales targeted mainly to the energy-hungry economies of China and India. The large LNG plant that Andarko has proposed to build will cost upwards of USD 25 billion, more than twice the country's entire gross domestic product. At today's prices, the 30-40 million tons a year of LNG which Mozambique may produce would mean revenues of around USD 30 billion. Prior to that, the country will already benefit from rising investment levels: ENI says it expects to spend 3.1 billion euros between 2012 and 2015; Andarko and its partners will likely spend more.

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It is hardly surprising that the heads of political leaders in Maputo are spinning, although it remains to be seen just how quickly and extensively all this will benefit the region. Current contracts with miners and oil companies apparently do not have the kinds of clauses demanding the use of local content as do the agreements forged by countries such as Brazil. This means that domestic companies could get the short end of the stick and be relegated to minor suppliers as quick construction means bringing in workers, equipment and materials from abroad. Also, resource booms can entrench elites and worsen corruption, a problem that has plagued Eastern Africa (Nigeria, Angola, etc.). How the soon-to-be-vast windfall earnings will be handled will depend largely on the governing Frelimo party, which grew out of the guerrilla organization known as the Liberation Front of Mozambique and has ruled since independence in 1975.

While Frelimo faces no credible political opposition, and the lines between party, state and business are blurred, there are at least two blocs within the party, one more on the left of the political spectrum and the other on the right. Importantly, though, in both groups there seems to be some understanding that Mozambique needs to manage its impending wealth well, to the benefit of all the people. The government has been pursuing prudent macroeconomic policies under a program supported and monitored by the International Monetary Fund. As a result, the economy managed to sustain a strong performance last year, the deteriorating international environment notwithstanding.

Real GDP grew by about 7.4%, helped by good harvests and the incipient boom in the mining sector. This year's expansion is expected to come close to matching that of 2011, although there are increased downside risks due to the worsened international environment. Remarkably, inflation has decelerated drastically from its peak of 16.6% at the end of 2010 to February of this year where it was running at just 2.5%. This is owed to the determination of the authorities to tighten fiscal and monetary policies, helped by a good harvest and a favorable base effect. The slowdown in monetary erosion has benefitted the poor and the general expectation now is that price rises will remain easily in the single digits in the current year.

Exports and direct foreign investment have stayed strong, paving the way for a surplus in the country's balance of payments and for a further strengthening of official international monetary reserves. These stood at about USD 2.4 billion at the outset of this year, increased from USD 2,160 million at the beginning of 2011 and from USD 2,100 million 12 months before that. The local currency, the metical, has been strengthening in the foreign exchange markets and still appears to have some upside potential, given the very large amounts of investment and other capital headed for the country.

To the credit of the local authorities, there is a sense that Mozambique should not become totally dependent on coal and gas and that the promising agricultural sector should not be neglected. Mozambique has an estimated 36 million hectares of arable land, an area larger than Belgium, but many of the projects touted by interested foreign investors have either not gotten off the ground or turned out to be failures. The government is now working on a scheme called ProSavana, for which Brazil is providing technical support because the terrain and climate are considered similar to its savannah region (Japan is assisting with financial support). Under this program, the government intends to map out millions of hectares of underused land to determine which crops should be grown there.

Dr. Belcsdk is president of S.J. Rundt & Associates, Inc. He may be reached at 973-731-7502 or at info@rundtsintelligence.com. More information can be found at www.rundtsintelligence.com.
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Title Annotation:SELECTED TOPIC
Author:Belcsak, Hans
Publication:Business Credit
Geographic Code:1USA
Date:Jul 1, 2012
Words:1130
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