Boston, MA -- (SBWIRE) -- 12/24/2013 -- The government's attack on Renamo's base and the latter's subse -quent unilateral cancellation of the 1992 peace deal raise the stakes in Mozambique's tense political environment. We retain our view that a return to all-out conflict is unlikely mainly because Renamo lacks the military clout and the popular support to sustain a protracted campaign. However, the latest developments increase the possibility that there will be further incidences of violent confrontation between the two parties, which will disrupt economic activity and sour investor perceptions of the country.

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At this stage, we retain our upbeat view on the Mozambican economy believing that real GDP growth will reach 8.1% in 2014 and increase towards double digits thereafter. However downside risks have increased thanks to the deterioration of the security climate.

Low inflation and a desire to lower commercial bank lending rates will provide Mozambican monetary authorities with the scope and the incentive to continue easing policy. We expect the benchmark policy rate will be decreased to 7.50% by the end of 2014, from 8.25% currently.

We believe that Mozambican monetary authorities will wait to see how quickly the economy recovers from a flood-induced growth slowdown in Q113 before deciding to enact further interest rate cuts, and we expect interest rates to remain at their current level of 9.00% for the remainder of 2013. That said, with inflation likely to remain relatively subdued thanks to a weak rand, the authorities have the scope to make further cuts if growth data in any way disappoints.

Major Forecast changes

No major forecast changes.

Key risks to outlook

As the recent floods have shown, Mozambique is vulnerable to adverse weather. Over the years ahead the weather, specifically too much or too little rain, will continue to pose a risk to the agriculturally-based economy.

The security situation poses a major threat to economic growth, the external accounts and government revenue as a significant deterio -ration would likely lead to reduced foreign investment inflows.

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