Fuelling Africa Fuelling the economic development of Mozambique

Fuelling Africa Fuelling the economic development of Mozambique and Southern Africa – Empowering its people Roadmap for Mozambique How to create a sustainable blue print For Mozambique’s future Speaker: Victor Viseu Day 2: 10 H 30 to 11 H 00 Oil &Gas – Mozambique 2013 Conference 2 – 5 December 2013 Maputo Mozambique

Area: 801, 590 square kilometers Population: (2011 est. ) 23, 929, 708 Average Life Expectancy (2011 est. ) : 50 years Currency : Metical (MZM) US$ 1 = MZM 29, 19 Natural Resources : coal, titanium, natural gas, hydropower, graphite GDP (2012 estimate) : US$ 14, 64 billion Real GDP growth (2012 estimate) : 7, 5% GDP per capita (PPP 2012 estimate) : US$ 1, 200 GDP per capita (2012 estimate) : US$ 612 Budget deficit (2012 estimate) : - 6, 5% of GDP Public debt (2012 estimate) : 39, 9% of GDP Inflation Rate (2012 estimate) : 3, 5%

Roadmap for Mozambique • • • Economic Performance indicators Major drivers promoting development Impact of Africa’s Economic Performance Economic transformation of Mozambique Attracting finance to the region

Economic Performance indicators • • • Economic growth – GDP and GDP per capita Inflation Foreign Direct Investment Current Account External debt Total Consumption at the SADC Region: 882. 000 BPD

Economic growth – GDP and GDP per capita Africa’s Economic Growth (2000 -2014) Source: African Development Report 2012 team based on data sourced from the Af. DB database.

Economic growth – GDP and GDP per capita GDP Per Capita by Region (Constant 2000 US Dollars) Source: African Development Report 2012 team based on data sourced from the Af. DB database.

Economic growth – GDP and GDP per capita Mozambique • GDP of 8, 4% for 2013 (IMF) was worlds’ top five economic growth – This value might be lower due to instability during the last quarter of 2013 restricting flow of goods between south and north of the country • GDP averaged 7, 7% for the last 15 years • GDP projected to grow more than 8% to 2018 • GDP per capita for 2012 was US$ 612, and expected to reach US$ 963 by 2017 (IMF) • GDP (PPP) per capita was US$ 1, 200

Economic growth – GDP and GDP per capita Sub-Saharan Africa’s Sectorial contribution to GDP (Percent, 2012) Source: African Development Report 2012 team based on data sourced from the Af. DB database

Economic growth – GDP and GDP per capita Mozambique’s Sectorial contribution to GDP (Percent, 2012) Source: Institute Nacional de Estatistica - Moçambique

Economic Performance Indicators Credit Extended by the Mozambican banking sector in 2011 and 2012

Economic Performance Indicators • Inflation – In 2012 was 3, 5% and in 2013 projected 4, 52%. Strong MZM helped. • Investment – – Interest rates in 2013: Lending 21, 19%; Deposit 11, 41% Domestic Credit to the economy in 2012 totaled US$ 3, 3 Billion Own funds of all Domestic banks limits lending per client to US$ 200 million Foreign direct investment (FDI) • African FDI has grown 32, 5% since 2007, double the growth rate in non-african developing markets and four times the growth in FDI for developed markets • Africa’s FDI has grown 87% during the last ten years, and will peak at US$ 159 billion by 2015 • SSA received most of FDI due to political unrest in North Africa. • FDI projects between 2002 and 2012 created in Morocco 116, 157 jobs, in RSA 78, 926 jobs and in Egypt 77, 883 jobs. Mozambique FDI generated less than 20, 000 jobs • In Mozambique in 2008 50% of FDI was for mineral resources; in 2012 of US$ 3 billion of FDI only 30% was for mineral resources • Between 2013 and 2016 there will be US$ 10 billion in FDI

Foreign Direct investments and Job creation Trend in FDI projects and associated job creation in Africa 574 70 000 506 60 000 516 500 50 000 375 244 373 408 400 322 307 40 000 30 000 600 247 300 FDI Projects 200 20 000 10 000 - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jobs Created 27 450 35 674 36 540 60 100 66 270 61 120 58 940 46 650 49 470 46 809 FDI Projects 244 307 247 322 375 373 574 506 516 408 Jobs Created 100 0

Foreign Direct investments and Job creation Examples of largest investments projects approved in Africa Company Origin Investment Location Jobs Created Description Year Lopesan-Satocan Spain Morocco 7 500 New mega project for Hotel group 2006 Nissan Japan Morocco 6 000 New location for car manufacturer 2007 renault France Morocco 6 000 New location for car manufacturer 2009 CCI International Germany South africa 4 500 Call center business servicing off-shore clients 2012 Shaanxi automobile Group China Algeria 4 000 New vehicle assembly unit for chineses automobile group 2008 Samsung Electronics South Korea Algeria 3 500 New production plant 2004 Volkswagen Germany South africa 3 500 Expansion of existing production operations and new workshop facility 2010 tele Tech United States South africa 2 500 New call center 2007 coroplast fritz Muller Germany Tunisia 2 500 Greenfileld wiring systems manufacture 2008 Portucel Portugal Mozambique 2 500 Paper manufacturing plant 2010 Source: AI Africa investor

Foreign Direct investments and Job creation Africa

Economic Performance Indicators • Current Account – Deficit in 2013 projected to US$ -4 billion or 25, 39% of GDP – Deficit in 2018 projected to US$ -8, 21 billion or 30, 84% of GDP – Reflects high dependency on mega projects – In 2012 Exports US$ 3, 516 billion, Imports US$ 5, 373 billion – in 2011 Exports US$ 2, 776 billion. Imports US$ 4, 187 billion

Current Account

Economic Performance Indicators • External debt – External debt reduced from a high of 138% in 2001 to a lowest of 33, 2% in 2011 – In 2013 will reach 42, 1% – Fitch Rating of Mozambican treasury bonds improved from B to B+, the same rating as Zambia, Ghana, Kenya and Cape Verde – The low score on the Human Development Index (HDI) limited further improvement on the rating.

Economic Performance Indicators

Major drivers that promoted African development • High commodity prices • Diversification of economies into agriculture, manufacturing and services • Trade reorientation to South –South and fast growing emerging markets - BRICS • Lower external debt • Increase FDI, and productivity improvements • Sustained remittances from African Diaspora • Improvements in the level of democracy and accountability • Strong economic and fiscal management • Decline on prevalence of armed and social conflicts • Rise in domestic consumption

Impact of Africa’s Economic Performance • Slow pace of poverty reduction. In 2012, 54% of population lived in poverty • Non-monetary measures of poverty – Considerable decline in Infant mortality rates from 199 deaths per 1000 live births in 2003 to 76 in 2012 – Increase in life expectancy from 37 years in 2000 to 52 years in 2012 – Net primary schools enrollment rate improved from 42 in 1999 to 90, 7 in 2009 – UNDP’s HDI (0. 327) ranks Mozambique on bottom of list of 178 countries ahead of two countries. – HDI – Human development index – dimensions such as Life Expectancy, educational attainment, decent std living • Income inequality. Population earning <US$1 per day (PPP) was 81% in 1997 down to 60% in 2003 (PARP reduce poverty to 42% by 2014)

GINI Index for selected African Countries 45, 7% Overall, the evidence suggests that the impressive growth in Africa since 2001 has not substantially led to a lowering of income inequality. African Development Report 2012

Impact of Africa’s Economic Performance • Environmental damage – Land degradation - soil erosion, nutrient loss and changes in crops • • • 4 to 12% of Africa’s GDP is lost to environmental degradation 85% of this loss is due to land degradation in Africa affects 65% of agricultural areas Globally land degradation could reduce food production by 12% in the next 25 years Residuals from pesticides in food and drinking water is a major health concern – Loss of forest cover • Net forest loss in Africa amounted to 3, 4 million ha per year during period 2000 – 2010 (FAO, 2011) due to economic activity and demand for affordable fuels • The large-scale forest loss aggravates climate change by contributing to GHG (green house gas) emissions • In central Mozambique degradation is estimated to contribute to 2/3 of net bio-mass loss – Depletion of fish stocks – Green house gas emissions. • CO 2 emissions in Africa have increase by 35% in the last 10 years to 930 million tons in 2010 • From 1971 to 2009 South Africa, Algeria and Nigeria contribute about 76% of total CO 2 annual emissions in Africa

Impact of Africa’s Economic Performance The 2012 African Development Report warns: African economic growth is currently consuming natural assets on a scale which threatens growth prospects and overshadows the progress achieved in social indicators.

Impact of Africa’s Economic Performance The 2012 African Development Report warns: Furthermore, African growth is slowly contributing to climate change. Loss of forest cover and GHG emissions from the fossil fuel based energy sector are the main drivers for this trend.

Impact of Africa’s Economic Performance – Research funded by FAO and UNDP warns: The persistence of environmental degradation and continued inequality in African countries necessitates a shift towards more inclusive and sustainable growth. Thus, African countries should pursue green growth pathways. The necessity for green growth becomes even more apparent considering the development challenges in the 21 st century.

Economic transformation of Mozambique THE ROAD MAP • The vision of an independent economy (1975) – “national economic project” following socialist development ideology • Increase in productivity and food production, industrial processing of raw materials(cotton, cashew, tinned veg, meat, cooking oil) • Organizing agricultural sector by building state farms • Privately owned industries were allowed as long they served national interest • The war time economy (1977 – 1992) – Economic growth reduced by 2, 3% per annum (collier 2007) – Government opted for liberal market economy by joining IMF and WB in 1984 – Aid from western and eastern Europe kept economy alive, led to massive dependence of aid. – Aid dependence reached US$ 1 billion equivalent to 75% of GDP (Hanlon 2007)

Economic transformation of Mozambique THE ROAD MAP • Aid based economy (1992 to date) – SAF in 1986 to 1987, was followed by enhanced SAF in 1990 – Level of aid reduced from above 50% in the 80’s to an estimated 35% of government budget or US$ 580 million – Perceived lack of progress in good governance led to “donor strike” in 2010 – Civil society pressurizes for more transparency in public sector and promotion of inclusive growth of the economy • From aid to business based economy – Natural resources and growing investment – Advantage of having non-resource based economy at present SAF – Structural Adjustment Fund

Economic transformation of Mozambique THE ROAD MAP • Risks on the new economy – Societal, institutional and rapid economic changes are not synchronized, therefore risking conflict – Expectations are higher than social and political capacities to absorb the economic transformation • Illegal economy brings serious security issues – Long coast line attracts illicit traffic through its borders – Reinforce police training and structures – Harmonize criminal law in the region

Economic transformation of Mozambique THE ROAD MAP • Risks mitigation on the new economy – Involvement of civil society will: • Provide on the ground evaluation on economic growth impact on income inequalities and HDI of the poor and human security; • Fight for environmental protection • Promote transparency on resources exploration contracts – Code of Ethics (2013) brings transparency to the government actions and reduces conflict of interest in governance – Resource curse to be avoided : • Create jobs connected to extractive industries – Linkage programs • Promote diversification into agriculture and tourism (value add and African branding. Eg Kenya tea vs Sri Lanka) • Promote Agripreneurs amongst youth – agribusiness is cool – Amiran Farmer’s kit promoting green house farming in 1, 000 high schools in Kenya – 60% of population is under 35 years, and 64% of unemployed are youth – Government / CSI to minimize risk for loans

Economic transformation of Mozambique THE ROAD MAP • Conditions for success for the new economy – Access to global markets – Resource management and environmental protection to be approached at regional level and continental level – Massive investment in human resources training • • Resources related technologies, general management strengthen state administration and institutional capacity CSR programmes should focus human capital development CSR will have a government POLICY for the extractive sector – Have supportive regulation in areas such as development of PPP framework, and extractive resources concessions – Government capacity to regulate income distribution to enhance the human security of its citizens

Economic transformation of Mozambique THE ROAD MAP Katharina hoffmann in her August 2013 research on economic transformation of Mozambique - implications for human security concluded: “Only if the government and its democratic structures make it possible for citizens to participate and create some regulating competence vis-à-vis national and international business, will Mozambique be able to act as a sovereign nation that is actively shaping the wellbeing of its people instead of exchanging one form of dependency for another”

Attracting finance to the region • Infrastructure requirements in Mozambique – CFM need together with its private partners US$ 20 to 25 billion to implement all the coal and natural gas rail and ports infrastructure construction projects. – Infrastructure to bring to market the 23 billion tons of coal from Tete province and the 150 TCF of natural gas from the Rovuma basin – Anadarko is due to make final investment decision on its 2 or 5 train LNG plant in Palma in Cabo Delgado valued up to US$ 20 billion • SADC’s Regional Infrastructure Development Master Plan (RIDMP)

Attracting finance to the region • Infrastructure Master plan adopted at 2012 summit in Maputo • IDMP Strategy – foundation for Africa economic community • It consolidates the SADC’s Free Trade Area, the COMESA-EAC-SADC Tripartite Grand Free Trade Area towards total integration of Africa • Need US$ 64 billion urgently to implement the first phase and could cost a total of US$ 500 billion in the next fifteen years • The SADC infrastructure vision 2027 is anchored in six pillars

Attracting finance to the region

Attracting finance to the region

Attracting finance to the region • Funding Options for Infrastructure projects – Locally currency Bonds • Treasury bonds • Commercial bonds – Foreign currency bonds (sovereign bonds) • All supported by QE programme of US$ 85 billion per month – Zambia, Rwanda, Nigeria, Mozambique, Ghana raising a total of US$2, 750 million with interest rates varying from 5, 375% (Nigeria)n to 8, 5% (Mozambique) and terms from 5 years to 10 years. Most oversubscribed. • These bonds open the way for municipalities and parastatals to also be funded by bonds

Attracting finance to the region • African Diaspora remittances – WB estimates Diaspora annual savings to reach US$ 53 billion – IFC set up in 2007 Diaspora Investment fund for infrastructure, bank capitalization, and debt management • Investment funds targetting institutional investors – BCG estimates Investment funds raised a record US$ 62, 4 trillion in 2012 worldwide – less than 1% of these funds is allocated to portfolio investments in Africa – Manufacturing Industry for import substitution is on the rise, and also industries downstream oil and gas. – The market cap for the whole of Africa, excluding RSA, is US$ 460 billion, just over that of apple Inc with US$ 442 billion – Riscura consulting found that 20 top institutional investors from RSA with US$ 150 billion of AUM had average allocation to Africa out side RSA of 5, 1% in 2013.

Attracting finance to the region • Sovereign wealth funds – Most of resource rich countries have SWF to manage effectively revenues from its extractive industries – Counter ill-effects of Dutch disease and revenue volatility – Botswana Pula Fund based in diamonds worth US$ 6, 9 billion – Angolan sovereign Fund with US$ 5 billion

Attracting finance to the region • Sovereign wealth funds – Stabilization fund – short term oriented and risk tolerant • Has deposit and withdrawal framework • Buffers economy from economic shocks and prices volatility • Invest in Liquid assets – Development fund – long term foreign financial assets • Acts as a holding fund until good return projects are identified • Invest in wider socio-economic projects and industrial development projects to diversify economy • Operates like a private equity fund • Self sustainable and has to have strict investment rules to avoid political interference

Attracting finance to the region • Sovereign wealth funds – Saving fund – inter-generational • Investments in private equity, real estate and infrastructure, generally in foreign markets • Share present wealth with future generations • Useful commitment mechanism curtailing short term political spending • It is only advisable when economies are mature (not developing)

Attracting finance to the region • Problems encountered by funders of Infrastructure projects and Mega Projects – Restriction of movement of capital cross border – Investors demands of returns of 25% in US$ terms – Corporate may accept 10% - 15% as criteria used WACC – Labour and wage cost, skill base, productivity, cost to get products to market and scalability – Market liquidity, portfolio diversification and requirement for better governance including international best practices regarding corporate disclosure and reporting – Nature of projects require minimum guarantee of medium to long term political and social stability

Attracting finance to the region THANK YOU