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Cablegate: July Monthly Economic Wrap-Up: Mozambique

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MAPUTO 001091

SIPDIS
STATE FOR AF/S
PRETORIA FOR JRIPLEY
JOHANNESBURG FOR RLO, FCS - RDONOVAN, JVANRENSBURG
USDOC FOR AHILIGAS
PASS USAID FOR AA/AFR AND AFR/SA
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD MZ
SUBJECT: JULY MONTHLY ECONOMIC WRAP-UP: MOZAMBIQUE

----------------------
FOREIGN INVESTMENT
----------------------
1. (U) Vodacom, the South African mobile phone operator that
began operations in Mozambique in December 2003, now estimates
that it has 100,000 subscribers in Mozambique. Mcel, the national
operator, estimates that is has 500,000 subscribers. There is
clear market growth in this sector and the number of total
subscribers is expected to rise to 1 million over the next five
years (Vodacom estimate). Vodacom mobile phone coverage now
extends to all provincial capitals, except Quelimane, which is
scheduled for coverage in August 2004. The South African firm is
ahead of schedule for installation and has launched a
particularly strong marketing campaign. A Vodacom source
announced that only 10-20% of their subscribers have come over
from Mcel, yet it bodes well for both firms that mobile phone
service is in demand. In Africa, Vodacom operates in Lesotho,
South Africa, Tanzania, the Democratic Republic of the Congo, and
now Mozambique. The cost of Vodacom service is lowest in
Mozambique. Vodacom has focused its marketing campaign on
attracting individuals and has not attracted many corporate
clients yet. Ninety-six percent of Vodacom's clients are pre-paid
subscribers. Vodacom estimates that it will "break even" in
another 12-14 months. Their Mozambique investment totals $200
million.

2. (U) The Corridor Heavy Sands Project (Australia) will spend
$500 million in the first phase of development for the initial
production of some 400,000 tons of titanium dioxide slag per
year. The project is based on immense deposits of titanium
dioxide minerals located near the town of Chibuto in the Gaza
Province. The deposits were discovered in late 1997, and
represent the world's largest known economic resource of titanium
dioxide and associated minerals. Corridor Sands will establish
an integrated heavy mineral sands mining, mineral processing, and
beneficiation operation that will include the mine and an
associated two-stage mineral processing plant. The minerals are
ilmenite, rutile, leucoxene, and zircon. Corridor Sands Limited
(CSL) has the exclusive right to develop the deposit and the
Industrial Corporation of South Africa holds an option to acquire
10% of CSL. For CSL to reach its planned full production level of
one million tons of titanium dioxide slag per year, the project
will require a total capital investment of approximately $800
million. Infrastructure construction will begin in 2006 and the
first production is anticipated for 2008. As a mega-project, CSL
operates in an industrial free zone. Mega-projects such as MOZAL
aluminum smelter and the SASOL natural gas pipeline fuel the
economic growth of Mozambique by an estimated 1-2% per year. With
two mineral processing mega-projects in the pipeline (Moma Heavy
Sands and Corridor Sands), Mozambique's economic growth will be
further fueled by this significant investment. Mozambique's GDP
growth has remained one of the highest in Africa over the 1992-
2003 period, averaging 8% growth per year.

3. (U) Universal Leaf Tobacco (Mozambican subsidiary known as
Mozambique Leaf Tobacco or MLT) continues construction on the
country's first tobacco processing plant in the province of Tete.
A local news source indicates that construction, which began in
July 2003, is moving along at a good pace and should be completed
within the predicted 15 months, allowing for plant inauguration
before the end of 2004. The $45 million undertaking (one of the
largest in the last several decades in Tete) is projected to
bring substantial development to the Tete Province, creating more
than 2,000 jobs. Universal Leaf Tobacco is one of the biggest
producers, processors, and exporters of tobacco in the world.
They operate in South Africa, Zimbabwe, Zambia, Malawi, Tanzania,
Ghana, and now, Mozambique.

4. (U) The GRM laid the first stone in building a pipeline to
supply natural gas to the city of Matola. The building of the
100km branch line linking the gas fields of Inhambane to Matola
was awarded to the newly formed Matola Gas Company (MGC) and
construction should be completed by June 2005. When the job is
completed and gas starts flowing to Matola, where much of the
country's industry is located (including the MOZAL aluminum
smelter), the cost of Mozambican fuel imports could be cut by
about $80 million/year (local news source). The MOZAL smelter
will be the pipeline's biggest customer, however, the gas will
supply smaller industries and the general public.

----------------
MACROECONOMICS
----------------
5. (U) In the recently published OECD "African Economic Outlook"
Report, a fairly positive picture is painted of the Mozambican
economy. According to the report, Mozambique's trade deficit was
reduced to 15% of GDP in 2003 (from 16% in 2002) and is set to
fall to 8.6% in 2004 and 7.7% in 2005. The trade deficit
reduction is largely due to the massive increase in exportation
of aluminum ingots, produced by the MOZAL aluminum smelter that
just inaugurated Phase II of operations (December 2003). Also
helping to even the trade balance is the higher price of
electricity that Eskom (South Africa) must pay for Cahora Bassa
power. Mozambique, Portugal, and South Africa signed an agreement
in early 2004 to raise these tariffs. The start of export of
natural gas down the SASOL-built and operated gas pipeline from
Inhambane to Secunda, South Africa, also helps boost the trade
balance. Fiscal revenues improved in 2003, reaching nearly 13% of
GDP, compared with 12.5% in 2002 and 11.8% in 2001. The report
attributes this to new, modernized taxes on personal incomes and
profits, as well as measures to limit tax exemptions for
investors. Inflation stood at 12.7% in 2003, driven by the rise
in price of imported oil and the strengthening of the South
African Rand. The report notes strong growth in the production of
food and cash crops, particularly of sugar, thanks to heavy
foreign (Mauritian and South African) investment rehabilitating
the sugar mills. The report makes clear that obstacles remain for
investors wishing to do business in Mozambique. Shortage of
domestic capital, high borrowing costs, excessive bureaucracy,
and inadequate infrastructure are some of the challenges that
remain.

----------
TOURISM
----------
6. (SBU) The Carr Foundation will invest an estimated $1 million
per year for the next several years into development and
rehabilitation of Gorongosa National Park in the Sofala Province.
This park was decimated in the civil war and very little wildlife
remains (an estimated 200 elephant, four zebra, and other
species). The Carr Foundation traveled to Mozambique in March
2004 to survey different areas for tourism investment. The
Foundation chose to invest in Gorongosa because of its location
on the Beira corridor and relatively good park access. The
Foundation will support the park in a 40-year financial
commitment that involves community development, conservation, and
economic sustainability through ecotourism. In the future,
tenders for tourism operators to work in the park will be
released. Although Gorongosa's ecosystem is still in place,
animals must be transferred from other parks (Marromeu, Niassa
Reserve, possibly Zimbabwe and South Africa) to start small-scale
tourism. Currently, only around 1,000 tourists visit the park
each year and each one spends as little as $5 on average during
their visit. Everything must be brought into the park, including
food, water, and fuel.

---------------------------
PORTS, ROADS, AND RAILWAYS
---------------------------
7. (U) CFM, the transportation parastatal, signed an agreement
with Cornelder (Holland) for a 25-year concession to develop and
privatize the port of Quelimane in Zambezia Province. Fourteen
million dollars in financing will be provided by KFW, a German
bank, allowing for port rehabilitation and modernization.
Cornelder is a long-time partner of CFM, as it signed a similar
agreement in 1998 to privatize container terminals at the port of
Beira, one of the country's most critical ports. The port of
Quelimane is less important and sees significantly less traffic
than the three biggest ports of Maputo, Beira, and Nacala.
Revitalization of the port will benefit Zambezia Province that
exports primarily tea, seafood, and timber.

--------
ENERGY
--------
8. (U) EDM, the national electricity company, will invest $700
million in the next 15 years to carry out electricity projects
throughout the country. With this level of investment, EDM
estimates that nearly one million customers will be connected to
the national electricity network (currently only 200,000 are
connected to the network). To make this happen, EDM must invest
$50-60 million per year until the year 2020. Presented at a
national workshop, the Electricity Strategy for Mozambique from
2005-2020 (financed by the African Development Bank), identifies
ways to strengthen the quality of electricity provided and
targets areas that are in need of electrification. To date, the
two most northern provinces of Cabo Delgado and Niassa have the
least amount of coverage. The plan discusses the need to
electrify Northern Niassa and more of Inhambane Province.
Additionally, it encourages strengthening of coverage in Maputo
and Beira. EDM is the only electricity provider in Mozambique.
The extremely low purchasing power of Mozambicans makes
investment in electrification unprofitable, making it difficult
to attract private investors. For this reason, the GRM will
likely remain the fundamental investor in electricity expansion
and refortification.

--------
LABOR
--------
9. (U) On July 21, the GRM launched a Labor Law Revision Seminar,
funded by UNDP, on the terms of reference and suggested changes
for the new labor law. This is a continuation of seminars that
has been taking place across the country (Beira, Nampula, and
Xai-Xai) to encourage dialogue on labor law reform. The law is to
be passed in 2005. The Seminar hosted participants from the
private sector, the government, the unions, and donor groups.
LA LIME

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