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Cablegate: Economy Slows: Zimbabwe, Energy Prices Faulted

VZCZCXRO2596
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #0675/01 2031441
ZNR UUUUU ZZH
R 211441Z JUL 08
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 9128
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0202

UNCLAS SECTION 01 OF 02 MAPUTO 000675

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV PREL MZ
SUBJECT: ECONOMY SLOWS: ZIMBABWE, ENERGY PRICES FAULTED

1. (SBU) SUMMARY: The Government of Mozambique (GRM)
reported first quarter 2008 GDP growth of 3.5 percent, down
from 8.1 percent growth in the same quarter last year.
Increases in prices of fuel and food--which appear to be
negatively impacting the economy and minimizing GRM attempts
to bring inflation into the single digits--have forced
President Guebuza to publicly defend GRM policies in this
area. South Africa's energy problems and the Zimbabwean
economy have hurt Mozambique's exports, while the value of
imports grew due to higher fuel and food prices--worsening
Mozambique's balance of trade. U.S. imports of titanium ore
from Mozambique increased 164.5 percent to $4.1 million in
the first quarter, while U.S. overall exports to Mozambique
remained almost steady at $38.8 million. While Mozambique's
overall economic fundamentals are still fairly strong, the
GRM seems to recognize that this recent negative economic
news--particularly rising prices--could have a negative
political impact, but has yet to take strong measures to
respond. END SUMMARY.

--------------------------------------------- ---------
GDP GROWTH SLOWS IN Q1, BUT SOME SECTORS STILL DYNAMIC
--------------------------------------------- ---------

2. (U) The Government of Mozambique (GRM) reported lower
preliminary estimates for 2008 first quarter economic
performance compared to 2007, with overall GDP growth of 3.5
percent compared to 8.1 percent last year. Some sectors of
the economy showed gains however, outpacing the average GDP
growth rate. These dynamic sectors include financial
services (29.4 percent increase), transportation and
communication (16.4 percent increase), and industrial mining
(12.6 percent increase). 2008 first quarter agriculture
figures show 8 percent growth over the equivalent period of
2007.

--------------------------------------------
FUEL AND FOOD PRICES UP; PRESIDENT DEFENSIVE
--------------------------------------------

3. (U) Petroleum imports in the first quarter of 2008 grew
nearly 20 percent to $115.7 million, equivalent to 15.5
percent of the value of all imports. Imported grain costs
increased by 32 percent to $53.6 million in the first
quarter. The domestic price of rice is up 28.9 percent from
May 2007 and the price of wheat flour is up 39.4 percent in
the same period, according to the Central Bank. President
Guebuza appeared defensive on cost increases of fuel and food
in an early July Frelimo Party meeting, outlining GRM steps
towards food price mitigation efforts including a "Green
Revolution" campaign to promote greater domestic food
production. On fuel, Guebuza pointed to the removal of the
VAT on diesel to neutralize increases in prices, as well as
other unspecified diesel subsidies to assist the
transportation sector. Over a 12-month period average annual
inflation has risen to 10.4 percent as of June 2008, well
above the GRM's target of mid single-digit inflation
anticipated by December 2008. The month of June 2008 alone
saw food price increases of 2 percent and gasoline price
increases of nearly 6 percent, according to the Central Bank.


--------------------------------------------- ----
EXPORTS DOWN: ALUMINUM, ENERGY, ZIMBABWE TO BLAME
--------------------------------------------- ----

4. (U) Mozambique's overall exports were down 7.1 percent
in the first quarter. Aluminum ingot exports (from the Mozal
smelter outside Maputo) fell in value by 13 percent to a
value of $330 million--aluminum accounts for 60 percent of
the value of Mozambique's exports. Mozambique's second
biggest export, electricity, was valued at $52.4 million in
2008's first quarter. Overall, Mozambique exported 19.2
percent less electricity, due to both South African power
company ESKOM transmission problems and because of power
supply cuts to ZESA (the Zimbabwean state power company) due
to lack of payment. Ernesto Gove, President of Mozambique's
Central Bank, has also publicly blamed decreased exports in
other areas on Zimbabwe's political instability, though
initial data does not clearly show which sectors might be
most affected.

--------------------------------------------- --------
IMPORTS FROM MOZ TO U.S. INCREASE DUE TO TITANIUM ORE
--------------------------------------------- --------

5. (U) Longstanding relationships with Europe and active
trade with southern African neighbors mean that Mozambique's
bilateral trade with the U.S. continues to be relatively
small, although U.S. exports to Mozambique nearly doubled
from 2006 to 2007. According to U.S. International Trade

MAPUTO 00000675 002 OF 002


Commission
(USITC) data, U.S. exports to Mozambique contracted slightly
by 2.9 percent in the first quarter of 2008, totaling $38.7
million, of which $15.3 million were fuel and mineral oils,
though there was significant growth (123 percent) in
electrical machinery and equipment compared to the same time
last year. U.S. imports from Mozambique in the first quarter
grew 164.5 percent thanks almost exclusively to titanium ore
exports of $4.1 million from a total export value of $5
million in the first quarter of 2008.

--------------------------------------------- --
COMMENT: GROWTH, PRICES MAY HAVE POLITICAL COST
--------------------------------------------- --

6. (SBU) Mozambique's economy -- while still a perennial
leader among non-petroleum producing states in southern
Africa -- appears to be slowing due to higher fuel and food
prices along with the domestic economic impact of power
transmission issues in South Africa and the continued
economic degeneration of Zimbabwe. Though these external
shocks are having an effect, the economy is still headed in a
positve direction. Both Standard & Poor's and Fitch have
upgraded Mozambique's country risk ratings from B to B ,
reflecting an overall reduction in external debt burden to
$3.287 billion as of December 2007--further aided by
Portugal's debt cancellation of an additional $393.4 million
on July 1. It is clear, however, that both President Guebuza
and the Central Bank are worried about the political impacts
of continued increases in the prices of food and fuel
highlighted by Guebuza's public defensiveness about his
government's policy response in these areas. We do not
anticipate either significant economic backsliding or a rapid
return to strong growth figures. Nonetheless, we will
continue to monitor public reaction to price increases and
its potential impact on the political climate, particularly
in the run-up to local elections in November this year, which
may become a public referendum on the Guebuza administration
in the runup to the general elections in 2009.
Chapman

© Scoop Media

 
 
 
 
 
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