2014 Quarter 2

Inflation - The latest data from the Instituto Nacional de Estatistica’s (INE) showed that showed consumer price index (CPI) inflation fell to
2.75% y-o-y in June, compared to 2.91% y-o-y in May. On a monthly basis, the CPI declined by 0.52% m-o-m in June, compared to a decrease
of 0.38% m-o-m the preceding month.

Growth - Preliminary data published by the INE indicates that the Mozambican economy grew by a real rate of 7.5% y-o-y in the first quarter of
2014, higher than the significantly revised 3.2% y-o-y recorded in the preceding quarter. Expansion in Q1 2014 stemmed primarily from growth
in the secondary sector (11.5% y-o-y), with the manufacturing sub-sector specifically performing well.

National development plan - The government has several medium- to long-term plans in place to address the issues of the impact of the coal
and gas industries on the economy, public investment spending, external competitiveness, debt sustainability, and investment planning. These
plans include the 2010-14 plan (Plano Quinguenal do Governo), the 2011-14 Poverty Reduction Strategy (PARP), and also the longer term plan
– Agenda 2025.

OPPORTUNITIES STRENGTHS
Significant coal reserves – estimated reserves of some 20 billion Diversification of exports – while mega-projects (including aluminium,
tonnes, with Mozambique potentially becoming largest coal producer in coal, and natural gas) still dominate Mozambique’s economic
Africa. landscape, the areas of interest are widening.
Vast natural gas deposits – deposits in the Rovuma basin are attracting Strong economic expansion – real GDP growth has averaged an
significant investment inflows, and could transform Mozambique into a impressive 7% p.a. during 2007-13, and is projected to average 7.8%
large player in the industry. p.a. during 2014-16.
Potential to become biofuel powerhouse – Mozambique boasts with Benign inflationary environment – consumer price inflation averaged
relative abundance of land, labour, water, and a favourable climate. 4.26% last year, and averaged 2.94% y-o-y in the first half of 2014.
Growing tourism industry – abundant natural beauty, combined with
Large amount of foreign direct investment (FDI) inflows – net FDI
improving infrastructure, is set to attract increasing amounts of
inflows are projected to account for 26% of GDP in the 2014-16 period.
international tourists.

VULNERABILITIES WHAT IS BEING DONE?

External debt levels are forecast to increase significantly in the short to The majority of the external debt being accumulated by the government
medium term. is on concessional terms, thereby mitigating risk of debt distress.
Reforms have led to a vast improvement over the past five years, and
Business environment is challenging and corruption rampant.
this is expected to continue in the coming years.
Private ownership of land is not permitted. Although progress has been
Weak protection and enforcement of property rights.
made, the legal system is still inefficient.
Very low level of social and economic development. GDP/head of only Real GDP growth rates of 7.9%-plus p.a. in the short to medium term
$605 in 2013. Potential for sporadic protests about the cost of living. expected, which will lead to significant improvement in GDP per capita.

MEGA TRENDS

Population 24,692,144 (July 2014 est.); Age 15 - 64: 51.8%

Population growth rate (%) 2.45% (2014 est.)

Life expectancy at birth Total population: 52.6 years; male: 51.85 years; female: 53.37 years (2014 est.)

HIV/AIDS Adult prevalence rate: 11.1%; People living with HIV/AIDS: 1.6 million (2012 est.)

Adult literacy rate (age 15 and over can

Total population: 56.1%; male: 70.8%; female: 42.8% (2010 est.)
read and write)

Urbanisation Urban population: 31.7% of total population (2013); Urban population growth: 3.3% (2013)

Population below national poverty line 54.7% (2009 est.)

Unemployment rate 16.93% (2008 est.)

Employment (% of total) Agriculture: 80.5%; Industry: 3.4%; Services: 16.1% (2003 est.)

Labour participation rate (% of total

84.4% (2012)
population ages 15+)

Business languages Emakhuwa, Portuguese (official), Xichangana

Telephone & Internet users Main lines in use: 77,568; Mobile cellular: 12.40 million; Internet users: 1.33 million (2013)

Sources: CIA World Factbook, World Bank, Trading Economics, UNESCO, ITU, UNAIDS, NKC Research

Total Mozambique
177
Corruption Perceptions Index 2013 (1 least, 177 most corrupt) 119
189
Doing Business 2014 (1 best, 189 worst) 139
148
Global Competitiveness 2013-14 (1 most, 148 least competitive) 137
178
Economic Freedom 2014 (1 most, 178 least free) 128
187
HDI Ranking 2013 (1 most, 187 least developed) 178
Source: NKC Research 0 20 40 60 80 100 120 140 160 180 200

Risk environment / Risk outlook

S&P Fitch Moody’s

B/Stable B+/Stable B1/Stable

Standard & Poor's (S&P) downgraded Mozambique’s long-term sovereign credit rating on February 14. The rating was lowered from “B+” to
“B”, with a stable outlook (S&P had placed Mozambique’s rating on a negative outlook in August 2013). The stable outlook reflects S&P’s
expectation that “investment spending will continue to weigh on Mozambique’s fiscal and external imbalances, but that the pace of economic
growth will remain high”. Fitch Ratings affirmed Mozambique’s foreign currency sovereign credit rating at ‘B+’ on May 16. According to the
rating agency, the affirmation reflects “the development of Mozambique’s significant mineral resources, infrastructure investment following the
country’s three-decade long civil war as well as a favourable macroeconomic policy environment”. Fitch also noted the lessened inflationary
pressures in Mozambique, which was supported by an appreciating currency and improved monetary policy. Moody’s Investors Service
announced on 20 September 2013 that it had assigned debut local- and foreign-currency issuer ratings to the government of Mozambique. The
agency provided the sovereign with a “B1” rating with a stable outlook, equivalent to the “B+” rating of Fitch.

Socio-
Continuity
Infrastruc- Diversity of Banking Foreign economic Forex
of Economic GDP Growth Key Balances
ture the Economy Sector Investment Develop- Reserves
Policy
ment
Fairly good and Under- Large structural Healthy and
Poor Improving Robust Strong Very low
improving developed twin deficits upward trend

Daily Trading
Stock Market Listed Companies Liquidity Market Cap Dominant Sector
Volume
Bolsa de Valores de
4 Limited $534m (17 July 2014) N/a N/a
Moçambique (BVM)

Capital Market Development Liquidity Maturity Range Municipal Bonds Corporate Bonds

Yes Underdeveloped Limited 91 days to 10 years No Yes, but still limited

Macro-economic overview
The Mozambican national statistics agency recently carried out a comprehensive revision and rebasing of the country’s National
Income Accounts. According to the INE, the change of the base year (from 2003 to 2009) "also provided an opportunity to introduce new
concepts and classification and improve the methodological aspects of compilation." As a consequence, there are significant discrepancies
pertaining to data released under the old methodology and the latest update. Over time, it is expected that Mozambique will provide historical
numbers that should iron out any difficulties in merging current and old data.

The Mozambican economy has expanded by more than 6% in real terms in every year since 2001, with the average real GDP growth at 7.7%
p.a. during 2001-13. This is an impressive performance, and has supported the country’s sovereign risk outlook. However, this growth has come
from a very low base; as a result, estimated GDP per capita was still below $610 in 2013, and this is a crucial weakness of Mozambique’s rating
at present. Poverty levels are also still extremely high, and infrastructure remains of poor quality. That said, there continues to be a favourable
outlook for the country’s economic growth performance over the coming years, with growth rates of 7.2%-plus p.a. being projected. Therefore,
Mozambique’s GDP per capita should improve considerably over the medium to long term.

Mozambique has a very large structural current account deficit. Although the country’s exports of coal, natural gas, and electricity are expected
to increase significantly in the coming years, imports related to the natural gas sector are projected to increase significantly as well, thus
ensuring that the current account deficit is likely to remain large for some time. Furthermore, Mozambique also needs to import most of its
capital and consumption requirements. The services deficit is also expected to remain large, in line with on-going expansions at several mining
projects, as well as planned construction of liquefied natural gas (LNG) plants. The current account deficit is expected to average 45.2% of GDP
during 2013-15, but this is offset by significant levels of foreign direct investment (FDI). Net FDI inflows are forecast to average 30.1% of GDP
over this period. Although Mozambique’s external debt is forecast to rise substantially, the majority of the increase can be ascribed to extensive
forecast borrowing by the private sector. Specifically, the forecast debt accumulation will be issued by foreign companies in order to produce
and export LNG. Therefore, despite the increasingly high levels, Mozambique’s accumulation of debt is deemed sustainable. The country’s debt
is also very affordable, with debt servicing payments forecast at only 0.7% of GDP in 2014. That said, the International Monetary Fund (IMF)
noted that the local authorities need to keep an eye on the pace of debt accumulation, especially after the $850m ‘tuna fishing’ bond was issued
last year.

Economic Structure as % of GDP

2013 Estimate
Source: NKC Research

Agriculture/
GDP
30.1%

Service/GDP
47.5%

Industry/GDP
22.4%

Agriculture remains extremely important for the economy, especially from an employment perspective, and the sector contributed an estimated
30.1% to GDP last year. The services sector is gaining in importance, with robust growth seen in telecoms and banking during the last few
years, and the sector accounted for 47.5% of GDP in 2013. Although the industrial sector dominates Mozambique’s export earnings – led by
aluminium, coal and electricity – it makes a much smaller contribution to GDP and employment. Mozambique has a massive amount of natural
resources, including agricultural land, coal, natural gas, and water. The contributions of coal and natural gas to foreign exchange earnings are
expected to increase considerably over the medium to long term.

Real GDP Growth & Net FDI/GDP

8.5 40.0
Source: NKC Research
8.0 35.0
7.5 30.0
7.0 25.0
6.5 20.0
6.0 15.0
5.5 10.0
5.0 5.0
4.5 0.0
2008 2009 2010 2011 2012 2013E 2014F 2015F
GDP Growth (y-o-y, %) (lhs) Net FDI/GDP (rhs)

Foreign investment into Mozambique remains of paramount importance to the economy. Mozambique has been receiving growing amounts of
FDI in recent years in relation to its favourable endowment of natural resources, with 2013 estimated to have been a record year. Consequently,
it will be difficult for Mozambique to match the net FDI flows attracted in 2012 and 2013, considering the significant amount received. As such,
net FDI is forecast to decrease from an estimated $5.5bn last year to $4.8bn in 2014, before decreasing further to $4.6bn in 2015. With regard
to Mozambique's economic expansion prospects, the industrial sector is forecast to grow by 4% this year, before increasing by 6.75% in 2015.
In addition to coal production, the sector should further be supported by increased activity in the construction and extractive sectors. The
agricultural and services sectors are forecast to expand this year by 5.5% and 8%, respectively. Our view is that it will take some time before the
supply of infrastructure in Mozambique catches up with the sharp increase in demand created by the increased capacity of coal production.
Overall, we expect Mozambique’s economic growth performance to remain strong over the short to medium term, sustained by the natural
resource boom and infrastructure investment. As such, real GDP growth is projected to increase from an estimated 7% last year to 8.2% in
2014, before decreasing slightly to 7.9% in 2015.

2013E 2014F 2015F Main Imports: % share of total 2013E 2014F 2015F

Petroleum Petroleum 13.11 12.44 12.75

Imports ($ bn)

Electricity
Electricity 3.41 6.73 8.07
Cereals
Cereals 2.94 3.21 3.66
Aluminium
Aluminium 1.96 1.65 1.23
Exports ($ bn)

Aluminium
Main Exports: % share of total 2013E 2014F 2015F
Coal
Aluminium 20.91 16.85 18.91
Electricity
Tobacco Coal 11.70 14.37 18.97

0.0 0.5 1.0 1.5 Electricity 6.60 7.95 9.00

Source: NKC Research
Tobacco 5.21 5.79 5.74

Imports are forecast to continue to rise substantially in the coming years, with imports related to the liquefied natural gas (LNG) sector in
particular forecast to increase significantly. Imports are projected to increase by 9.7% from an estimated $8.6bn last year to $9.5bn in 2014, and
by a substantial 14.5% to $10.9bn next year. While the sizable increase may appear to be alarming, the majority of the costs are projected to be
financed externally by foreign companies, and should therefore have a minimal domestic impact. Furthermore, once LNG exports commence
(the earliest projections are for 2018), the trade deficit should narrow considerably. In addition to an increase in exports, imports will show a
steep decline once the construction phase of the LNG plants is completed (around 2023). In the short to medium term, however, Mozambique’s
trade deficit is projected to widen from an estimated $4.6bn last year to $4.9bn in 2014, before increasing further to $5.4bn next year.

Current Account & Budget Balance

(% of GDP)
0.0 0.0

-10.0 -3.0

-20.0 -6.0

-30.0 -9.0

-40.0 -12.0
Source: NKC Research
-50.0 -15.0
2008 2009 2010 2011 2012 2013E 2014F 2015F
Current Account/GDP (lhs) Budget Balance/GDP (rhs)

According to the World Bank’s latest economic update on Mozambique, dated April 2014, the current account deficit amounted to $1.7bn in the
fourth quarter of 2014, compared to a deficit of $2.1bn during the same period a year earlier. On a cumulative basis for 2013, the World Bank
estimates that Mozambique recorded a current account deficit of $5.9bn, largely due to “continuing capital imports of large-scale investment
projects in the extractive industries and infrastructure sectors”. Mozambique’s expansionary 2014 budget reflects the allocation of the sizable
capital gains tax received last year towards once-off needs, including election costs and capital expenditures. Total fiscal expenditure is forecast
to increase by 26.5% from an estimated MT167.3bn in 2013 to MT211.7bn this year, but only increase by a marginal 1.9% to MT215.8bn in
2015. In turn, fiscal revenues are forecast to decrease by a marginal 0.4% from an estimated MT146.14bn last year to MT145.6bn in 2014,
before increasing by 13.7% to MT165.6bn next year.

Average CPI (% change, y-o-y)

16.0
Source: NKC Research
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2008 2009 2010 2011 2012 2013E 2014F 2015F

The Monetary Policy Committee (MPC) of the Banco de Moçambique (BdM, the central bank) met on July 11 in its seventh session of 2014.
Policymakers decided to hold the benchmark interest rate steady at 8.25%, the deposit rate was maintained at 1.5%, and the required reserves
ratio was maintained at 8%. The BdM also intends to intervene in the money market to ensure that the money supply in circulation does not
exceed MT50.471bn by the end of July, up from the limit of MT48.023bn set for the end of June. The next MPC meeting is scheduled for August
13. Despite inflation falling below 3% y-o-y during the last three months, there remains some concern about food prices, which recorded a rise
of 5.85% y-o-y in June. Furthermore, there remains the possibility of ‘importing’ inflation from South Africa (Mozambique’s largest trading
partner), where CPI inflation was most recently recorded at 6.6% y-o-y in June. That said, Mozambican inflation remains well under control, with
the MPC’s tight monetary policy stance assisting in this regard.

CONTACT DETAILS

KPMG NKC

NKC Independent Economists CC

12 Cecilia Street Paarl, 7646, South Africa

Filipe Mandlate – designation is Partner P O Box 3020, Paarl, 7620

Tel +258 21 355 200 Tel: +27(0)21 863-6200

Email fmandlate@kpmg.com Fax: +27(0)21 863-2728
Email: research@nkc.co.za

GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by
any person upon such information or opinions.

© 2014 KPMG Auditores e Consultores SA, is a Mozambican limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG
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