Recurrent extreme weather events will likely delay Mozambique's economic recovery and exacerbate risks to long-term growth prospects, ratings agency S&P Global Ratings has warned.

It estimates that the Mozambican economy has likely grown by only 1% in 2020 but that real gross domestic product (GDP) growth of 5.5% is possible from this year.

The estimate follows as climate risks and the effects of Covid-19 have weakened economic performance in the last two years, with the effects of the pandemic and of cyclone Eloise, as well as intensification of the insurgency in the Cabo Delgado province, potentially weakening economic recovery further this year and delaying development of liquefied natural gas (LNG) projects.

Cyclone Eloise is the latest storm to hit Mozambique and, on January 23, flooding hit parts of Beira city in the Sofala province, destroying homes and business infrastructure and also displacing people.

Mozambique is prone to extreme weather events, with multiple Category 4 cyclones having struck the country between 2019 and early this year. This includes two tropical cyclones in 2019 − Idai and Kenneth − which caused significant economic disruption and a severe humanitarian crisis in parts of the country where access to basic services is limited.

According to the Global Climate Risk Index (CRI), Idai was the deadliest and costliest cyclone recorded in the south-west Indian Ocean, displacing 250 000 people in Mozambique.

Less than two months after Idai, Mozambique was hit by the strongest cyclone ever recorded in Africa, Cyclone Kenneth, which hit the northern part of the country, destroying homes and cutting power, communications and access to clean water.

The CRI ranks Mozambique as the country most affected by extreme weather in 2019, with the two cyclones having affected 2.5-million people and causing at least 600 fatalities. Economic losses amounted to $3.2-billion according to the World Bank and Oxfam, with manufacturing, infrastructure and social sectors worst affected.

This is significant in a country with low wealth levels and very low insurance penetration at only about 1.5% of GDP.

Almost two-thirds of the population lives in rural areas, subsisting on agriculture, which accounts for up to a quarter of Mozambique's GDP and has also been hit by droughts in the past. In 2016, El Nino conditions caused severe drought and food insecurity.

In the aftermath of the 2019 cyclones, the International Monetary Fund (IMF) provided $118-million in April 2019 and disbursed $309-million in April 2020 as part of emergency financial assistance under the IMF Rapid Credit Facility to support Mozambique's funding needs during the Covid-19 pandemic.

The African Development Bank committed $1.7-million to immediate humanitarian relief and is helping Mozambique to build risk management capacity through the African Risk Capacity (ARC) agency. Part of the African Union, ARC is helping member countries manage climate-related risks using financial solutions. Natural catastrophe insurance will likely help manage long-term climate risks and build economic resilience, S&P says.

Taking all of this into account, S&P’s view of Mozambique's institutional, economic and financial profile reflects the adverse influence of environmental, social and governance factors.

From natural disasters to security threats in the North posing risks to its social cohesion and macroeconomic stability, the country's weak institutional capacity, uneven political will to address challenges, high indebtedness, and low level of development are all “long-term constraints to its creditworthiness”.