In this PPT I share my (selected) macroeconomic update and a call on the Mozambique Monetary Policy Committee as it met on August 30, 2018. As it turned out, the Committee agreed with my judgement of no change in the Central Bank overnight Permanent Facility Offer rate (FPC – Facilidade Permanente de Cedência) which together with its sister deposit rate (FPD – Facilidade Parmanente de Depósito) remain the principal policy rate. It did also keep unchanged the Compulsory Reserve Coefficient on domestic currency deposits, while slating for an increase the reserve coefficient on foreign currency deposits starting September 7, 2018 on account of increased volatility of the exchange rates. It did however cut by 75 base points its newly introduced policy rate (which was introduced in May 2017). Not unexpectedly, the Committee does run a more positive spin on growth and inflation by focusing on a moving twelve months averages while I focused on year-on-year changes over the first halves and quarters. But all in all we agreed: the Committee stayed put as I expected! They now have to remain vigilant as the political cycle heats up starting with the local elections the coming October followed by the general election in October 2019.

1. Mozambique Headlines and a Bet on
the MPC Meeting, August 2018
(A snapshot with selected data up to end-July 2018)
Roberto J. Tibana
tibanarj@analitica-rjt.com
Analitica-RJT
August 30, 2018

2. 1. Growth
The growth cycle remains downwards
worsening…
• Average GDP
growth over the first
two quarters of
2018 was at 1.4% y-
o-y (or 1.3%
seasonally adjusted
by INE)
• This is the lowest in
the last ten years
(i.e., since 2008)
3.4
2.4
3.3
2.8 2.8
3.4
3.7
1.8
2.6
1.8
1.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Mozambique: GDP quarterly growth; y-o-y,
average of first two quarters

3. 2. Inflation
… the inflation cycle is picking up…
•In July 2018
(latest available)
inflation was
4.7% y-o-y
• This is back to where
it was in October
2015 when the
recent inflation
upsurge started-5
0
5
10
15
20
25
30
98 00 02 04 06 08 10 12 14 16 18
Mozambique inflation: percent, y-o-y
December 1996 - July 2018
July 2018: 4.7%
October 2015: 4.7%

4. 3. Bank Lending Interest Rates
… are moving down but remain very high chocking demand
and business…
• Nominal interest rates
were at around 25% in
June 2018,
• while falling, they are
only back to where
they were in 2002 or at
their previous cyclical
peaks in 2006 and
2011.
• (Ex-post) real interest
are also falling sharply,
• but still high at around
20.%, and highly
volatile
• Together: big
challenges for demand
-5
0
5
10
15
20
25
30
35
98 00 02 04 06 08 10 12 14 16 18
IRLM_7 IRLM_15
IRLM_30 IRLM_45
IRLM_60 IRLM_90
IRLM_180 IRLM_1YEAR
IRLM_2YEAR IRLM_OVER2YEAR
Real (ex-post) bank lending Interest rates 2001m01 - 2018m06
10
15
20
25
30
35
40
45
50
98 00 02 04 06 08 10 12 14 16 18
Bank lendig nominal interest rate 7 days (mzn, monthly average)
Bank lendig nominal interest rate 15 days (mzn, monthly average)
Bank lendig nominal interest rate 30 days (mzn, monthly average)
Bank lendig nominal interest rate 45 days (mzn, monthly average)
Bank lendig nominal interest rate 60 days (mzn, monthly average)
Bank lendig nominal interest rate 90 days (mzn, monthly average)
Bank lendig nominal interest rate 180 days (mzn, monthly average)
Bank lendig nominal interest rate 1 year(mzn, monthly average)
Bank lendig nominal interest rate 2 years(mzn, monthly average)
Bank lendig nominal interest rate over 2 years(mzn, monthly average)
Nominal bank lending Interest rates 2001m01 - 2018m06

5. 4. The dynamic term structure (curve) of bank
lending interest rates
… has flattened after becoming negative in October 2016…
• The slope of the bank lending curve
that has been negative since October
2016 started to correct 12 months ago,
but uncertainty remains regarding its
most recent past (and near future)
direction, auguring continued
unfavorable market expectations:
• It bottomed up at -4.6 in August
2017, but has now flattened (0.2 in
April, 0.0 in May, and -0.2 in June,
2018)
• N.B.: Readers interested in some technical details
should see the last two slides
-16
-12
-8
-4
0
4
8
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
RATE_TERM_SLOPE_EMP_OVR728_15
RATE_TERM_SLOPE_EMP_728_15
RATE_TERM_SLOPE_EMP_728_30
RATE_TERM_SLOPE_EMP_364_45
RATE_TERM_SLOPE_EMP_364_60
RATE_TERM_SLOPE_EMP_364_90
RATE_TERM_SLOPE_EMP_180_90
Slope (smoothed)
Slope of bank lending yield: model derived and empirical counterparts

6. 6. Treasury yield curve
… the (short) treasury yield curve slid into negative
territory pointing to unfavorable expectations …
• The short treasury
yield curve (BT364-
BT91) turned
negative in
February/March
2018 and has
remained so up until
July [series of long term
treasury bonds rates are not
publicly available, precluding
assessment of the curve over
the medium and long term!]-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
PP(%)
Axis Title
Treasury short curve: BT364-BT91
(Jan. 2005 - July 2018)
November, 2016 (-9.0%)
February, 2018 (-0.10%)
July, 2018 (-0.22%)

7. 7. And … the political economy of it!
…is also a little bit … messy!
• Like in 2002, inflation in the current ‘political
cycle’ heightened too late, after the failure to
bring it down earlier in the tenure of the
current administration.
• Historically inflation ticked up in the pre-
general election year, only to fall during the
general election year as…
• … as also historically the authorities stayed
put or lowered the policy interest rate during
the election years, only to hike it when
inflation upsurge in the first year of the new
administration
• Will the authorities manage to keep it at its
current low levels during the ongoing (2018-
2019) election cycle years? Probably
Yes/Maybe not! Too many factors at play.
History may not repeat itself. Circumstances
are different, and some factors are not
considered in this presentation!
0
10
20
30
40
50
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
Central Bank standing facility offer rate for comercial banks
Annual inflation (12 months % CPI change)
MIMO
Central Bank Policy Rates (FPC and MIMO), Inflation, and the Political Cycle
[Rates to june; Inflation to July; Political Cycle to December 2018]
Political Cycle in bar colors: Pink= pre-General Election year; Greeen: General Election year

8. 6. So, Which way should the MPC Go?
… near stagflation and heated political cycle make a
cobweb for monetary policy making!
• Conventionally slowing growth would call for continued easing of monetary tightening
• However the threat of inflation would recommend otherwise
• It seems that the markets do not really believe in a continued monetary easing (see the
treasury short yield curve and the slope of the bank lending term structure)
• I think that the political economy of the election cycle is probably what dominates market
confidence and expectations, and there is little the Central Bank can do about this factor.
• While the Monetary Policy Committee (MPC) will consider many other factors that I have not
touched on in this presentation (the fiscal and the external sectors, mainly), on the
account of what I have looked at I would expect them to stay put! No
further cutting and no resumption to hiking the policy rate (both FPC and
MIMO), while waiting for third quarter numbers and the way the political
cycle will play out on expectations.

9. The next three slides provide guidance on the
technical details underlying the estimation of the
dynamic terms structure of bank lending interest
rates
Readers interested in further details of empirical
implementation and results used in this
presentation should contact me at
tibanarj@analitica-rjt.com .

10. 1. Dynamic latent factor model
Diebold, Glenn and Rudebusch (2005); (Diebold and Li (2002); Nelson and Siegel (1987)
• Nelson and Siegel (1987):
• 𝑦 𝜏 = 𝛽1 + 𝛽2
1−𝑒 𝜆𝜏
𝜆𝜏
+ 𝛽3
1−𝑒 𝜆𝜏
𝜆𝜏
− 𝑒 𝜆𝜏 … … … … … … … … . . (1),
where 𝜷 𝟏, 𝜷 𝟐 , 𝜷 𝟑 are interpreted as level, slope and curvature factors of
the yield (term structure) curve, and the terms that multiply them are
factor loadings into interest rates of various maturities.
• Diebold and Li (2002); Diebold, Glenn and Rudebusch (2005):
• 𝑦𝑡 𝜏 = 𝐿 𝑡 + 𝑆𝑡
1−𝑒−𝜆𝜏
𝜆𝜏
+ 𝐶𝑡
1−𝑒−𝜆𝜏
𝜆𝜏
−

11. State space representation
Assuming the dynamics of 𝑳 𝒕, 𝑺 𝒕 , 𝑪 𝒕 to be a first order autoregressive process
𝑦𝑡( 𝜏1)
𝑦𝑡( 𝜏2)
..
.
𝑦𝑡( 𝜏 𝑁)
=
1
1 − 𝑒−𝜆𝜏1
𝜆𝜏1
1 − 𝑒−𝜆𝜏1
𝜆𝜏1
− 𝑒−𝜆𝜏1
1
1 − 𝑒−𝜆𝜏2
𝜆𝜏2
1 − 𝑒−𝜆𝜏2
𝜆𝜏2
− 𝑒−𝜆𝜏2
.
.
.
1
1 − 𝑒−𝜆𝜏 𝑁
𝜆𝜏 𝑁
1 − 𝑒−𝜆𝜏 𝑁
𝜆𝜏 𝑁
− 𝑒−𝜆𝑁
𝐿𝑡
𝑆𝑡
𝐶𝑡
+
𝜀𝑡( 𝜏1)
𝜀𝑡( 𝜏2)
.
.
.
𝜀𝑡( 𝜏 𝑁)
… … … … . (3)
is the set of signal equations, and
𝐿𝑡 − 𝜇 𝐿
𝑆𝑡 − 𝜇 𝑆
𝐶𝑡 − 𝜇 𝐶
=
𝑎11 𝑎12 𝑎13
𝑎21 𝑎22 𝑎23
𝑎31 𝑎32 𝑎33
𝐿𝑡−1 − 𝜇 𝐿
𝑆𝑡−2 − 𝜇 𝑆
𝐶𝑡−3 − 𝜇 𝐶
+
𝜂𝑡( 𝐿)
𝜂𝑡( 𝑆)
𝜂𝑡( 𝐶)
… … … … . (4)
is the set of transition equations that drives the dynamics of the state vector.

12. The system in matrix notation with assumptions
about the Variance covariance matrix
•
𝑓𝑡 − 𝜇 = 𝐴 𝑓𝑡−1 − 𝜇 + 𝜂 𝑡 … … … … … … … … … … … … … (5)
𝑦𝑡 = Λ𝑓𝑡 + 𝜀𝑡 … … … … … … … … … … … … … … . . … … … … … 6
𝑤ℎ𝑒𝑟𝑒
𝜂 𝑡
𝜀 𝑡
~ 𝑊𝑁
0
0
,
𝑄 0
0 𝐻
… … … … … … … … … … … … … … (7)
𝐸 𝑓0 𝜂 𝑡
′
= 0 … … … … … … … … … … … … … … … … … … … … . . (8)
𝐸 𝑓0 𝜂 𝑡
′
= 0 … … … … … … … … … … … … … … … … … … … … . . (9)

13. Thanks for your interest!