The Monetary Policy Committee (MPC) of the Banco de Moçambique (BdM) met on April 16 in its fourth session of 2014. Policymakers decided to hold the benchmark interest rate steady at 8.25 per cent, the deposit rate was maintained at 1.5 per cent, and the required reserves ratio was maintained at 8 per cent.
Although the consumer price index (CPI) y-o-y inflation rate increased in March (the first time it has done so since September 2013), inflationary pressures remain relatively benign.
According to the MPC, factors that influenced the trend in Mozambique’s inflation during Q1 were floods earlier in the year and an acceleration of inflation in South Africa, which were offset by the nominal appreciation of the local unit against the US dollar and the South African rand.
Expansion of the Mozambican economy continues to be strong. Preliminary data published by the Instituto Nacional de Estatistica (INE) indicates that the Mozambican economy grew by a real rate of 7.1 per cent y-o-y in the fourth quarter of 2013, lower than the revised 8.2 per cent y-o-y recorded in the preceding quarter.
Expansion in the last quarter of 2013 stemmed primarily from growth in the tertiary sector (8.8 per cent y-o-y), with the transport and communications sector specifically performing well. Average GDP growth is estimated at 7.2 per cent during 2013 and projected at 8 per cent this year.
The Bank of Namibia’s (BoN) MPC held its latest meeting on April 16 and decided to keep the repo rate unchanged at 5.5 per cent. In justifying its decision, the MPC noted that the “global economy improved somewhat during the fourth quarter of 2013” and that it expects the recovery to gain further traction this year.
The Namibian economy also continued to perform satisfactory, while the growth outlook remained encouraging, expected to reach 5.3 per cent in 2014. In addition, the MPC expects inflation will remain below 6 per cent y-o-y for the remainder of the year, which is still considered a “sustainable level.”
However, although still deemed adequate to maintain the fixed exchange rate to the South African rand, the BoN acknowledged that foreign reserves have come under pressure due to a rapid increase in the import bill and that this situation warrants monitoring going forward.
The BoN’s recently published Annual Report for 2013 indicated foreign reserves amounted to N$15.7bn at the end of 2013. This translated into an import cover ratio of only 2.6 months last year, well below the International Monetary Fund’s (IMF) three month international benchmark. However, the MPC noted that foreign reserves increased to N$17.5bn by April 11, which suggests the risk in this regard has eased slightly.
Nonetheless, a widening current account deficit will keep foreign reserves under pressure for the remainder of the year. Also, due to the comparatively low level of foreign reserves, the BoN is expected to any further interest rate hikes by the South African Reserve Bank (SARB) to prevent the possibility of capital outflows, or at the very least, not allow the real interest rate differential to become too large.
The latest Reuters poll of South African economists indicates that most analysts expect another 50 bps increase in the SARB repo rate during 2014. The South African central bank surprised economists when in late January it made a big upward revision in its inflation forecast for 2014, forcing the hand of policymakers to tighten monetary policy.
This lifted local lending rates from multi-decade lows. The move provided some support to the South African rand, which had the dubious honour of being the worst-performing emerging market currency during 2013.
While the exchange rates in Southern African countries like Angola, Malawi and Mozambique are currently around the same levels compared to a year ago, the currencies of the Common Monetary Area (CMA, including Lesotho, Namibia, South Africa and Swaziland) are around 15 per cent y-o-y weaker against the US dollar.
The rand is a victim of concerns about economies with large current account deficits and trade links to the slowing Chinese economy. This has also impacted the Botswana pula (around 7 per cent y-o-y weaker) that operates as a crawling peg against a basket of currencies, of which the rand comprises 55 per cent.
BY: Christie Viljoen – Senior Economist – NKC Independent Economists