Previous Quarterly Editions
Expropriation Risk: 65 65 65 66 Political Violence Risk: 59 59 60 60 Terrorism Risk: 45 45 45 45 Exchange Transfer and Trade Sanction Risk: 64 64 64 55 Sovereign Default Risk: 83 83 83 83
TREND ▼
Just one year into President Filipe Nyusi’s second (and last) five-year term, the administration seems to be in a political and economic cul-de-sac. An escalating Islamic youth revolt in the gas-rich north of Mozambique has seen the withdrawal of major liquefied natural gas (LNG) gas investors due to the increasing security risks and the inability to pay back illegal debt taken in future gas revenues. The limited progress in all business and social-service sectors due to crippling state finances caused by the Islamic youth revolt, combined with the Nyusi administration’s inability to secure new international loans due to debt defaults and the lingering COVID-19 pandemic, has severely undermined the administration’s legitimacy.
Even though COVID-19 has hit Mozambique relatively mildly, the effects from societal lockdowns and Mozambique’s main trading partner, South Africa, closing its borders to migration to up to half a million informal and formal workers in search of economic opportunities, has severely undermined Mozambique’s economy.
The deepest concern has been the Islamic youth revolt in Cabo Delgado province, which since 2017 has slowly but steadily escalated and is now threatening the LNG investments. Recent attacks at the end of March and early April 2021, when Islamic-inspired youth took control of strategically important Palma, has seen investors withdraw from two out of three LNG investments. Only the smaller off-shore Italian-led ENI LNG project is presently moving ahead. The major US-led ExxonMobil LNG project postponed further investments last year in 2020 due to COVID-19, Islamic attacks and low oil/gas prices. Between March and April 2021, the French Total-led LNG project (formerly owned by Anadarko) withdrew all staff from Cabo Delgado as Islamic-inspired fighters conquered Palma town next to Total’s fenced onshore site. At the end of April 2021, Total declared force majeure with domestic contractors and the government on its exploration and production concession contract, suspending any further work for at least a year.
Government forces, private military companies and foreign advisors from the United Kingdom, United States and South Africa seem to have managed to regain control of Palma. Yet the ability of the insurgents to conquer strategic port towns effectively at will has severely undermined the Nyusi administration’s credibility among international investors. Dreams of a gas bonanza started in 2010 when over 180 trillion cubic feet (tcf) of natural gas was discovered in the Rovuma Basin in northern Mozambique. The gas discoveries saw more than USD60bn being pledged by international oil companies. Projections were that gas production would start in 2019 with LNG production reaching 100 million tonnes per year (mt/y) and government revenues of USD95bn over 25 years, doubling current annual state expenditure of USD3.5bn per year.
However, the gas ‘bubble’ has burst, with the first gas expected from the ENI offshore fields in 2022 at the earliest (ENI´s project accounts for just 3 mt/y, or 3% of the potential). The reasons for the burst are complex. First, in 2015 it transpired that, in the transition from former President Armando Guebuza to Nyusi, more than USD2.3bn of illegal loans was taken out by three hastily set-up state companies backed by state guarantees. The secret loans undermined the economy. All foreign donors withdrew from budget support, and the IMF ended its loan guarantees. Even though the IMF and most donors have returned for humanitarian reasons (and maybe geostrategic resource reasons) after several cyclones and COVID-19 hit the country, the approach is now more cautious, with little trust in the government or state.
Second, the window for selling gas was always relatively short, as the global investment environment for LNG sees it as a transitional ‘fuel’ from coal/oil for electricity generation to non-carbon fuel reality. Other LNG investments have moved faster, turning Mozambican deposits into a strategic reserve, with ExxonMobil in 2020 writing off more than USD17bn in gas assets. Third, growing global environmental concerns have seen strong investor pressure being put on energy companies to stop fossil-fuel production, including gas. This has led to major cuts in new gas investments, with Mozambique now being put low on investment lists due to the security and governance risks.
TREND ►
Mozambique is formally a multiparty democracy with a constitution embracing the rule of law and with the state as custodian of all land and resources. However, like most developing countries, legal changes, regulation and controls can be used to retake state control over land and concessions from private investors when politically expedient. Nevertheless, in practice this rarely happens to foreign investors if they follow the country’s rules or have strong backing from major regional and geopolitical players.
Due to Mozambique’s difficult economic situation, the country’s ruling FRELIMO party elite is dependent on foreign investments. Balancing South African, Chinese, European and US regional and geopolitical concerns means foreign investors have mostly had the upper hand in the last 20 years. Relying on strategic alliances with FRELIMO elite factions may smooth access to concessions but can be precarious, as experiences from the coal sector suggest. Former leaders can fall from favour when new presidents of FRELIMO begin to assert themselves.
At the end of 2020, the Nyusi administration approved a new media and information bill that severely curtails foreign and national news agencies reporting on the security situation and on the government’s performance. Several news agencies’ headquarters have been firebombed and raided by security forces in the last half year of 2021. Journalists reporting on the Islamic-inspired youth revolt have disappeared and/or been arrested.
As there are years until the next general election (2024), violence against political opponents is not expected to be strong in the near term. However, as FRELIMO gears up to selecting a new leader and presidential candidate for 2024, political violence related to factional conflict within the party is expected to escalate, with kidnappings and ransoms being demanded for release.
The terrorism threat in Cabo Delgado and by extension northern Mozambique is now clear, but the source of the Islamic youth revolt, which has strong local backing, is contested. The Nyusi administration insists it is being orchestrated from outside Mozambique, whereas Mozambican and international researchers suggest it is predominantly caused by local grievances related to gas and the FRELIMO elite’s grabbing of economic opportunities in gas, precious stones, timber and the like. Studies suggest a strong sense of population abandonment by their government, with foreign multinational companies being seen as cooperating with the FRELIMO elite in reaping the benefits of the country's natural resources.
Future counter-insurgency scenarios will therefore not just be about the military struggle: they will involve 'winning hearts and minds', something the Mozambican government’s forces are poorly equipped for without effective foreign logistic and technical assistance. The key is better and fairer governance of resources, with investment in local communities in schools, roads and jobs.
Present legislation provides various instruments for the conversion of foreign currency into the Mozambican metical and central bank control over currency accounts. All legislation has presently been de facto relaxed, to attract major foreign investments. Instead, present legislation and policies put local businesses in a difficult place, with high-interest rents and restrictions on foreign currency accounts.
After falling out with the International Monetary Fund (IMF) over the secret debt scandal in 2015, the relationship has become warmer, but is based on little trust. Mozambique is at present not able to honour repayments of foreign loans and has over the last five years struggled to finance the state-owned oil company´s participation in the gas investments.
The government survives on domestic loans with regional/national banks for balancing its budget. The price is high-interest rents with domestic banking thriving as one of the few sectors. Talks with the Paris Club about a new round of international debt relief after the cyclones, COVID-19 and Islamic revolt will perhaps provide a new window of opportunity for Mozambique to get rid of its long-term debt.
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