Economic stakes are high in Mozambique’s elections

Economic stakes are high in Mozambique’s elections
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Low risk of post-electoral violence bodes well for investor confidence in Mozambique. However, potential changes to the regulatory framework and slow infrastructure development are likely to hinder investment in the booming coal and natural gas sectors.

Calm ahead of critical elections

Mozambique will go to the polls on 15 October 2014. This marks the fifth multi-party presidential and parliamentary elections since the end of a 15-year civil war prompted by the signing of the Rome General Peace accords in 1992 between Frelimo (Frente de Libertação de Moçambique) and Renamo (Resistência Nacional Moçambicana).

The general elections take place in the wake of two years of low intensity conflict between Frelimo government forces and armed elements of the Renamo opposition group. With the signing of a peace deal between the two on 5 September 2014, the hopes for ‘silencing the guns’ have resurged, sending a credible signal to investors of probable stability in the aftermath of the upcoming polls.

Although alarmist voices ahead of elections in an African country are common, Mozambique seems to be an outlier. This may explain its relatively scant presence across international media.

But the low likelihood of post-electoral violence should seldom be a motive to downplay the importance of general elections in a country like Mozambique. Indeed, these elections constitute a critical inflexion point at a time when the southern African country is set to become one of world’s leading natural gas exporters.

Natural economic boosters

With over 170 trillion cubic feet of discovered gas reserves in the northern Rovuma Basin, the government expects this sector to attract capital inflows worth $70 billion in the coming 10 years – a figure almost five times Mozambique’s 2013 GDP.

With multinational energy companies (MNECs) like Italy’s Eni and the US’s Anadarko leading the exploration of reserves, others (i.e. Exxon, Shell, BP) are lining-up to participate in future bidding rounds for offshore exploration blocks, while China’s National Petroleum Corporation (CNPC) has already purchased a 20% stake from Eni’s Area 4 project.

Moreover, gas is not the only game in town. The coal mining sector is well-established, with London-listed Rio Tinto and Brazilian Vale developing mega-projects in Tete province, while financing rail infrastructure that links the northern provinces to southern ports.

With projections of coal exports amounting to 50 million tonnes per year, the coal and gas sector are set to boost an economy that has grown at an annualized average rate of over 7% in the last decade, with GDP forecasted to grow above 8% in 2014 and 2015. The IMF recently calculated that continued production in the extractive sector could potentially increase growth by 2 percentage points annually from 2013 to 2023.

Given the significant growth potential, the stakes are evidently high. When political dynamics matter so much for subsequent economic performance, investors become acutely concerned with electoral outcomes – Mozambique is no exception.

Likelihood of post-electoral stability

Like many of its African peers, politics weighs significantly on the Mozambican economy. With aid and foreign direct investment (FDI) providing the lion’s share of the government’s current sources of financing (40% and 26% of GDP, respectively) – stability is a fundamental economic driver. Recent political developments reinforce the likelihood of a non-violent post-electoral environment for two main reasons:

1. Renamo is not what it used to be. The opposition armed group has repeatedly been the active peace spoiler throughout post-independence history. The ruling Frelimo party, however, has repeatedly engaged in fraudulent behaviour, most notably in 2009. While Renamo’s historical grievances are legitimate, its recourse to armed violence is sometimes questionable. The signing of the recent peace deal revealed Renamo’s credible intention to become a fully fledged political party.

Having acquired more representation within the National Electoral Commission in February 2014, Renamo conceded to Frelimo’s demand to progressively disarm in exchange for greater representation in state institutions (especially the armed forces), a larger share of the country’s natural resource benefits and amnesty to its leader, Afonso Dhlakama. Through these political concessions, Frelimo has somewhat appeased the armed propensities of Renamo.

2. Frelimo’s interest in empowering Renamo. In turn, Frelimo sees this peace deal as a strategic move to halt the recent rise of a second opposition party, the Mozambique Democratic Movement (MDM), which gained considerable ground during the November 2013 municipal elections boycotted by Renamo. Acknowledging Renamo’s political decline, Frelimo may be seeking to prop Dhlakama’s political outreach and pit it against the MDM, particularly as the latter is in control of three of the country’s largest municipalities (Beira, Nampula and Quelimane) and is popular among young urban voters.

Frelimo is still expected to win the elections. In turn, Renamo is likely to regain the trust of swing voters and recapture the significant amount of seats it has lost in parliament. This would effectively bolster its political weight and reduce its proclivity to use violence as an expression of discontent.

Not all about stability

But the absence of violence does not imply that the economy will not be affected. Ever since the 2010 anti-government riots prompted by the rising cost of living, Mozambican citizens have increasingly demanded benefits from the natural resource endowments as their per capita incomes have stagnated amid accelerating GDP growth rates.

This has led Frelimo candidate Filipe Nyusi to pledge greater state ownership in the extractive industries, implying higher local participation and potential changes to the fiscal regime that would affect the profitability of MNECs.

These policies, although favourable for the development of the economy in the medium-term, could be a significant deterrent to FDI in the short-term if MNECs see their prospective benefits being incrementally taxed and their ownership progressively reduced.

Political obstacles to extractive sector growth

The executive’s dominance over policy and legislative implementation implies that the government has significant power over the development of its economic sectors. In spite of its historically business-friendly orientation, a probable Frelimo government is likely to shift policy, leading to contract renegotiations and the introduction of higher taxes. Yet, the slow development of gas infrastructure (especially liquefied natural gas pipelines and terminals) poses a major obstacle to sector growth.

The significant delays in implementing a new legislative framework for the extractive sector, as a result of pre-electoral uncertainty relating to Frelimo infighting and clashes with Renamo in the northern and central provinces, have prompted MNECs to interrupt their investments. This has put a premium on infrastructural development, which the National Petroleum Institute has calculated will cost over $20 billion.

Despite the likely absence of post-electoral violence, MNECs face considerable regulatory and operational risks in the extractive sectors. After the election, the government is likely to impose higher taxes on MNECs and reduce their ownership. Moreover, ongoing displacement of local communities along construction sites will continue to undermine MNECs’ operations as past violent demonstrations and road blockades have demonstrated. If so, FDI could take a hit, with the elected government authorities confronted with the uneasy trade-off between responding to local demands and the need to continue attracting foreign capital for the crucial development of its coal and gas sectors.

About Author

Jose Luengo-Cabrera

Jose currently works at the EU Institute for Security Studies. He has previously worked for the European External Action Service, International Crisis Group and the United Nations Department of Peacekeeping Operations. His research focuses on developments across Sub-Saharan Africa, principally on the drivers of political (in)stability and economic growth in West Africa. The views expressed on this site are Mr. Luengo-Cabrera’s and do not reflect those of the EUISS or any previous institutional affiliations.