The plight of a state-owned fishery is threatening the outlook and stability of Mozambique’s balance of payments.

On 18 December, the International Monetary Fund (IMF) approved Mozambique’s request for an SDR 204.5 million ($147.8 million) Standby Credit Facility. The first disbursement of SDR 85.2 million ($61.6 million) was made available immediately.

The facility is meant to safeguard against external shocks and a balance of payments gap, factors with both led to Standard & Poor’s (S&P) downgrade of the Government’s ratings earlier this year and Moody’s decision to place it on credit watch this December.

“Despite challenges, Mozambique’s economic growth continues to be robust and inflation remains low. However, lower commodity prices and a decline in foreign exchange inflows have generated a temporary balance of payments gap,” Min Zhu, Deputy Managing Director and Acting Chair, said. “The authorities have taken strong policy measures to preserve macroeconomic stability. Continued implementation of prudent policies under the standby credit facility will be essential to ensure debt sustainability, safeguard against external shocks, as well as promote strong and inclusive growth.

“A vigorous debt management strategy will be crucial to address the challenges of significant infrastructure gaps at a time when debt vulnerabilities have been rising,” he added.

Zhu cited corrective measures from the Government, including a tightened monetary policy stance and 2016 budget, that should help. However he warned that the Government and Central Bank in particular should be ready to stand by and even tweak their policy for tougher liquidity conditions.

The fate of a relatively young state-owned fishery, Empresa Mocambicana de Atum (EMATUM) has been on the minds of IMF, Moody’s and S&P alike. The fishery’s initial bond offering in September 2013 was wildly oversubscribed: Credit Suisse raised $500 million, VTB raised $350 million, and the state guaranteed an 8.5 per cent yield. At the time, Mozambique authorities estimated a massive annual catch and $200 million in revenue. EMATUM reported a loss of $25 million in 2014.

Finance Minister Adriano Maleiane broke to parliament in June 2015 that the bond needed restructuring, including an extension of the repayment period and possibly lower interest rates. His comments, followed by Banco Nacional de Investimento’s attempts later this year to reorganise the bond (at the Government’s request) triggered some market panic. Considering the Government’s current fiscal pressures, paying the difference on the bond would be an extremely damaging cost to shoulder.

Not long after Maleiane’s speech, S&P downgraded Mozambique’s long-term rating to ‘B-‘ and put its long- and short-term ratings on negative watch, saying, “The financial difficulties of Ematum, established in 2013, raise broader questions about Mozambique’s governance and public sector debt management, in our view,” S&P said in a July statement.

“We no longer project that Mozambique will exhibit high per capita growth for a country at its stage of development,” it added. S&P does not rate the EMATUM bond, but noted that $774 million of the $850 million loan is still outstanding.

Moody’s highlighted the state of the foreign exchange reserves of the Bank of Mozambique as well, comparing the August 2015 estimated of $2.5 billion to $3.2 billion in reserves just a year earlier. On 20 December, Moody’s placed Mozambique’s B2 government issuer rating and the B2 EMATUM senior unsecured foreign-currency rating both under review for downgrade.

It added that the deterioration in the external debt of both the Government and the whole economy has continued, reaching respectively an estimated 60 per cent and 99 per cent of GDP in 2015, and that as a result of the depreciation of the currency against the US dollar (which the EMATUM notes are denominated under), the burden of Government’s future external debt payments is increasing.

“The capacity of the authorities to respond to these challenges is uncertain because the pressures are strong and the room for manoeuvre limited,” it said. “Any external financing or additional foreign direct investment could help alleviate the pressures. In the current global environment however the authorities’ capacity to attract further FDI or secured long-term external financing is uncertain.”

An upgrade is very unlikely, the ratings agency said.

Economic prospects

Despite the EMATUM question and low commodity prices, Mozambique’s economic forecast remains positive, in large part due to strong foreign direct investment and a tapering of import-heavy infrastructure projects. GDP growth averaged seven per cent over the last five years, and a lower but still strong 6.3 per cent is expected in 2015 (and 6.5 per cent in 2016).

The IMF expects that over the medium-term, growth should recover to 7.5 to eight per cent, supported by continued big investment in natural gas projects and higher coal production. Inflation is expected to increase towards the Central Bank’s medium target of five to six per cent, due to the recent depreciation of the metical and adjustments in administered prices.

But, “balance of payments pressures are increasing and the exchange rate has depreciated substantially”, IMF Directors said in a statement following their review. The Directors advised a tighter monetary policy stance and further actions to curb inflation and improve the foreign exchange market. They also highlighted the ‘urgent need’ to develop an action plan to improve EMATUM’s profitability. Making EMATUM profitable weighs heavily in Mozambican authorities’ plans as the repayments loom.

Source: CPI Financial