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