Index Trend Previous Quarterly Editions
Expropriation Risk: 66 ► Political Violence Risk: 60 ► Terrorism Risk: 45 ► Exchange Transfer and Trade Sanction Risk: 55 ► Sovereign Default Risk: 83 ►
Risk Temperature 66 (Medium-High)
TREND ►
The greatest political and economic concern for President Filipe Nyusi has been the Islamist youth revolt in Cabo Delgado province, which since 2017 has slowly but steadily escalated, with more than 800,000 people being displaced and thousands killed. In March-April 2021, this Islamist-inspired youth revolt threatened to take over the areas demarcated for the USD30bn liquefied natural gas (LNG) investments led by the oil majors, French Total and US ExxonMobil. The economic and political success of Nyusi’s second and last five-year term ending in 2024 has hinged on getting the LNG investments going -- debt payments for illegal loans of more than USD2bn consider the future gas bonanza in order to finance the regime’s transition from former incumbent Emilio Guebuza to Nyusi in 2014.
The gravity of the situation first saw the ExxonMobil-led consortium postpone its huge LNG project in Cabo Delgado in 2020 due to the Islamist attacks, COVID-19-related uncertainty and low oil and gas prices. This was followed in April 2021 by the French Total-led consortium withdrawing, declaring force majeure and suspending further work for at least a year due to Islamist-inspired youth threatening to overrun its installation in Palma.
The government tried hard to avoid a Southern African Development Community (SADC) intervention until July 2021. This changed when government forces, backed by private military companies and foreign advisors from the United Kingdom, United States and South Africa, failed to control the strategic coastal areas around the important town of Palma. This undermined the administration’s credibility within Mozambique and internationally among international investors and regional governments.
Under pressure from all sides, the SADC Mission in Mozambique (SAMIM) was formally launched in August, after a month of discussion about its size, who should pay and logistical concerns. SAMIM consists of more than 1,600 troops from Tanzania, Zimbabwe, Botswana, Lesotho, Angola and South Africa under South African command. But before SAMIM deployed, in July Rwanda deployed 1,000 military and police to Cabo Delgado after the Nyusi government invited them.
While not approved by parliament at the time, the Rwandan troops went into combat and by September had driven the Islamist youth militants out of the coastal areas. They have now been backed by SAMIM, which has also forced the revolt to retreat. A major question is who will pay for the deployment of Rwandan troops; one possibility is stakes in the future of gas revenues -- undermining the long-term gains from Mozambique’s resource endowment. Where Mozambique originally was expected to generate well above USD80bn in revenues from Cabo Delgado-based LNG, new predictions suggest that at best it would be USD28bn to USD55bn by 2048. More realistically, revenues could be as low as USD18bn by 2048 due to the expected green energy transition putting pressure on new carbon investments.
Meanwhile, COVID-19 has hit Mozambique relatively mildly, with a formal total of 1,851 COVID-19-related deaths by August 2021. The main effects have been economic, caused by lockdowns and the holding back of foreign tourists and investments. This has severely undermined Mozambique’s economy.
Expropriation Risk 66 (Medium-High) TREND ►
Mozambique is a multiparty democracy with a constitution embracing the rule of law and with the state as the custodian of all land and resources. However, legal changes, regulations and controls can be used to resume state control over land and concessions from private investors when politically expedient. Nevertheless, this rarely happens to foreign investors if they have strong backing from major regional and geopolitical players.
The country’s ruling Frelimo party elite is dependent on attracting foreign investments and therefore must balance South African, Chinese, European and US regional and geopolitical concerns. The danger is therefore less the risk of expropriation than that any strategic alliance with top Frelimo elite factions that is designed to smooth access to concessions and economic opportunities can backfire, as support is always precarious and based on the politics of the day.
Political Violence Risk 60 (Significant) TREND ►
The approval of a new media and information bill in 2020 that has the potential severely to curtail foreign and national news agencies reporting on the security situation and on the government’s, performance has so far proved less restrictive. Since the SAMIM intervention, civil society and research institutions have been able to host events discussing the Islamist-inspired youth revolt.
Political violence is only really expected to kick in nearer the next local elections in 2023 and the general election in 2024. However, as Frelimo gears itself up to select a new leader and presidential candidate for 2024, intra-party factional conflict is expected to escalate. Violence against political opponents is therefore not expected to be strong in the near term, but the present demobilisation of Renamo soldiers after the Agreement on the Definitive Cessation of Military Hostilities of August 2019 between Renamo and the Mozambican army has seen political violence resurface, including the killing of Renamo cadres in the centre of the country.
Terrorism Risk 45 (Medium) TREND ►
Rwanda’s early military success and SAMIM’s steady involvement have put pressure on the government to deal with the causes behind Mozambique’s Islamist youth insurgency: socio-economic marginalisation, high unemployment, low literacy, poverty and inadequate services. To date, the Mozambican response to the insurgency has been largely military, with soldiers, police, private security contractors and now SADC and Rwandan forces all involved.
Dealing with the multi-layered history of socio-economic marginalisation would require the administration challenge the powerful former Makonde generals that control most of the land and the opportunities related to resource extraction in Cabo Delgado, such as gas, precious stones and timber. Nyusi himself is a Makonde and was backed by the elite in becoming Frelimo’s leader. This suggests that, even though the short-term military battle can be won, the battle for long-term social and political stability could be lost.
Even through the terrorism threat in Cabo Delgado and by extension northern Mozambique is high, at present there seems little danger of it becoming nationwide. However, the populous province of Nampula, which is largely Islamic too, is the next province in line for being opened up for new exploratory drillings for gas and oil. Nampula is known as a ‘rebellious’ province: in contrast to Cabo Delgado, it has never really accepted Frelimo rule.
A greater immediate security danger is economic hijackings for a ransom, which usually peak up to the festive season. While historically the hijacking season has run from November to February and mainly targets ‘Indians’ (Pakistanis, Indians, Middle Easterners and so on) and businessmen from wealthy trading families, the targets have increasingly come to include various people and families with the resources to pay a ransom. Despite attempts at weeding out unsavoury elements in the police and security apparatus, as they seem to work with the hijackers, the effects have been limited. This is creating considerable uncertainty.
Exchange Transfer and Trade Sanctions Risk 55 (Significant) TREND ►
Present legislation provides various instruments for the conversion of foreign currency into the Mozambican metical and for central bank control over currency accounts. All legislation has presently been de facto relaxed to attract major foreign investments. However, present legislation and policies put local businesses in a difficult place, with high-interest rents and restrictions on foreign currency accounts. Not only has the private sector suffered greatly from the COVID-19 pandemic, but access to finance is very difficult, with Mozambique’s benchmark interest rate reaching 18.9% by mid-September.
Sovereign Default Risk 83 (High) TREND ►
Having fallen out with the International Monetary Fund (IMF) over the secret debt scandal in 2015, Mozambique’s relationship with the IMF is still characterised by a lack of trust. Mozambique is currently unable to honour its 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 further undermining future revenues as foreign investors ‘carry’ the state-owned oil company ENH’s participation in the investments. This must be paid back with high interest first, before any substantial revenues can be extracted.
The Financial Stability Report recently published by the Bank of Mozambique reveals that public debt contracted by the government in 2020 grew to 96.7% of gross domestic product (GDP), up from 78.8% of GDP in 2019. Most of the debt is external and domestic debt stock obtained from the Mozambican banking sector, which generally has a surplus from its short-term, high-interest lending of rent to the government. The overall stock of public debt has therefore increased considerably over the past year, not least due to the vast increase in state expenditure largely due to military spending. Public expenditure was not offset by increased tax revenues because the economy stood still due to COVID-19, which saw a sharp fall in economic activity, with revenue collection declining by 14.6%.
An IMF report of April 2021 forecasts that Mozambique will continue to have to borrow to meet public expenditure and that debt may reach 125.3% of GDP, which could rise by one percentage point in 2022. Consequently, the international market’s confidence in Mozambique remains shaky, with the country expected to continue to experience restricted access to international financial markets. This will put further pressure on the domestic financial market in terms of exchange and interest rates, as the government continues to rely on domestic borrowing crowding out private-sector financing.
