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Risk Assessment for Financial Institutions in Mozambique

Mozambique’s economy is poised to remain robust in 2024, driven by its extractive sector, particularly coal, bauxite and liquefied natural gas (LNG). The country’s geographical position, mineral and agricultural resources, and hydroelectric potential make it an attractive destination for investment. However, the country faces several risks that financial institutions should be aware of.

Economic Risks

  • Mozambique’s economy is heavily reliant on raw material prices, with aluminum, coal, and gas exports accounting for a significant portion of its revenue.
  • The country’s port and transport infrastructure are also inadequate, limiting its ability to export raw materials.
  • Additionally, the banking system is constrained by government financing needs, which can lead to credit constraints for private sector entities.

Security Risks

  • The situation in Cabo Delgado remains a major concern, with an ongoing Islamist insurgency fueled by social and religious tensions.
  • The government has collaborated with international partners to maintain security and facilitate investment in LNG projects. However, further unrest broke out in November 2023 and continues to this day.

Governance Risks

  • Mozambique’s governance structure is a major risk factor for financial institutions.
  • The country’s ruling party, Frelimo, has dominated the political landscape since independence, with President Filipe Nyusi seeking a third term in office. This could lead to a lack of transparency and accountability in government decision-making.

Environmental Risks

  • Mozambique is highly vulnerable to climate change, which poses a significant risk to its agricultural sector, which employs nearly 80% of the population.
  • El Niño events have already had a devastating impact on agriculture, and further extreme weather events could exacerbate this risk.

Currency Risk

  • The Mozambican metical is at risk due to the country’s high levels of external debt and private external debt.
  • The government has borrowed heavily in foreign currencies, which exposes it to currency fluctuations. Additionally, private companies have taken on significant foreign debt to finance their operations, which could lead to default if interest rates rise or the metical depreciates.

Conclusion

Mozambique presents a complex risk landscape for financial institutions. While its economic growth prospects are attractive, the country’s reliance on raw material prices, inadequate infrastructure, and governance risks make it an uncertain investment environment. Financial institutions should carefully assess these risks before investing in Mozambique.