Mozambique Business Forecast Report Q3 2009

Compared to other economies in the region, Mozambique looks set to weather the global economic crisis relatively well. Economic activity will surely slow, but the country will remain a regional leader in terms of real GDP growth. On the political front, we believe the dominance of ruling Frente de Liberta????o de Mo??ambique (Frelimo) is unlikely to be dented significantly in the forthcoming election in October 2009. Meanwhile, the banking sector of sub-Saharan Africa in general is well-off compared to other regions, and Mozambique is no exception. That said, the country will hardly remain untouched by the crisis; Mozambique's public finances look set to remain under strain over the coming years and remittances will likely suffer.

Following the success of the local and municipal elections at the end of 2008, we believe Frelimo is likely to remain in power. While we do not see electoral fraud as a major risk, we are concerned that mounting rivalry between main opposition party, Resist??ncia Nacional Mo??ambicana (Renamo), and breakaway Mozambique Democratic Movement (MDM) could escalate should the latter outdo the former in the National Assembly elections. Although the MDM stands a good chance of assuming the mantle as the main opposition given the way it is cannibalising Renamo members, its support will come primarily at the latter's expense rather than that of the ruling Frelimo.

On the economic front, rapid growth has been driven by large scale FDI projects that have held up better than feared in the global recession. Unfortunately, while enhancing the external position, these mega-projects remain effectively enclaves in the economy, leading much of the population to depend on remittances from recession-hit South Africa. The concomitant probable drop in remittances will be one of the most direct ways the recession is felt by the general populace. However, this will be at least partially offset by government spending - while revenues will likely see slower growth due to mine closures and the potential scaling back of all-important aid commitments, it looks probable that expenditure will continue to rise as the government seeks to reduce economic hardship, especially in the run-up to elections.

Finally, with respect to the business environment, official policy recognises the need to upgrade the contribution of the domestic private sector to socio-economic development. Policy reforms are taking place to make it easier to establish and operate enterprises, but entrepreneurs still face major hurdles in terms of official interference, corruption, and gaining access to seed and working finance. Furthermore, the country's physical infrastructure is in many places inadequate. That said, the government has launched major plans to upgrade the country's electricity and transport infrastructure which will improve trade.