Mozambique warned on resource boom
Lessons to learn from rest of Africa; local banks may be left behind.
The commercialization of Mozambique’s huge natural resource discoveries in oil and liquefied natural gas is being buoyed by a growing banking system and robust investment, says Antonio Correia, CEO of Banco Unico in Mozambique.
Once political stability resumes, I would predict FDI flows will increase once more
But the country will do well to heed lessons learnt from other commodity driven countries in Africa, Correia explains, as the repercussions of falling commodity prices are felt throughout the continent.
“If a country relies heavily on exporting one commodity, when global pressures force prices down and currency depreciation ensues, the country is going to find itself in a lot of economic problems. We can see this happening in pockets around Africa in places such as Nigeria and Angola,” says Correia.
“Banks and the oil and gas sector will do well to ensure that they thoroughly manage the risks involved: syndications, advising corporates to diversify, as well as understanding cash-flow rotation for these companies are good ways to start, especially in an environment that is growing and changing so quickly, where one new big player in the oil and gas sector has the potential to change the game,” he says.
Although starting from a low base, Mozambique’s growth has been impressive: annual GDP growth has averaged 7% over the last four years, mostly on the back of natural resources.
SPTEC Advisory, a firm that focuses on the oil and gas industry in the Middle East and Africa, estimates that Mozambique has approximately 28.3 trillion cubic metres of natural gas reserves.
Capital has flooded into the country. According to the UN Conference on Trade and Development World Investment Report published in June this year, cross-border M&A volumes increased in Mozambique from $2 million in 2013 to $2.7 billion in 2014.
Investment in the oil and gas sector will be transformational for the country. According to data from Standard Bank, development of an LNG plant in Palma – a fishing town on the northeast coast of the country – will lead to a real GDP increase of 800% by 2035 and will provide the government of Mozambique with more than $200 billion in receipts.
Sooner or later, corporates will start delaying projects
David Renwick, Barclays
“[But] a number of southern African economies may struggle for dollar receipts in the short term,” says David Renwick, managing principal of Africa Banking at Barclays Africa Corporate and Investment Banking, “due to delays in FDI flows as a result of changes in government and because those that have historically been large commodity exporters have seen prices and volumes come under pressure.”
He adds: “Sooner or later, corporates will start delaying projects because revenues won’t be as high as expected.”
While M&A volumes have been robust, FDI levels have fallen from $6.2 billion in 2013 to $4.9 billion in 2014, which has been blamed on political instability and security concerns around the lead up to disputed election results in October 2014 when Filipe Nyusi of the Mozambique Liberation Front Frelimo party was elected president.
“Once political stability resumes, I would predict FDI flows will increase once more,” says Correia.
Bill Blackie, head of investment banking and head of client coverage at Standard Bank, says: “The business environment in Mozambique is thriving. If you look back to just six or seven years ago, Mozambique was among one of the poorest countries in world, but we have seen a huge turn around in the country. Businesses are planning their strategies properly and engaging with the investor community.
“Indeed, by initially focusing on the country’s wealth in natural resources – as many other countries in Africa have done – Mozambique will be able to take its growth to the next level. In a perfect world, one would want the country to begin diversification of its economic base now, but this isn’t that simple. Overall, the country is doing an excellent job in building its economy and we should continue to support this.”
Division of labour
Banking activity in the country has been increasing because of the natural resources boom, especially corporate investment banking products. However, for the time being regional and international banks will earn most of the business, rather than their local counterparts, say bankers.
“As of yet, local banks in Mozambique do not have the dollar liquidity to service the companies eager to develop the country’s gas sector, nor do they have the domestic savings base to support the sector with local currency, consequently the capitalization of this investment will require significant FDI,” says Blackie.
“Some local banks in Mozambique don’t have the balance sheet to finance large natural resource-based projects in Mozambique. At the moment, being a bank of our size, we finance the sub-contractors that service the bigger players in the country,” says Correia.
Banco Unico, one of Mozambique’s newest banks has been growing at lightning speed since it opened its first five branches in August 2011. Within two years of opening, Banco Unico was the sixth largest bank in the country. In June 2014, South African bank Nedbank acquired a 36.4% stake.
“Our relationship with Nedbank,” says Correia, “provides us with the skills and expertise to develop our investment banking franchise while at the same time giving them exposure to Mozambican growth. Through partnerships such as this, local banks in the country will be able to get exposure to some of the larger deals being done and reap the benefits of the countries growth.”