Bloomberg: Mozambique’s Debt Swap Offers Relief, Even With Downgrades

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Mozambique’s plan to restructure its so-called tuna bond may give the cash-strapped nation’s currency temporary relief and help curb inflation, even as the country’s debt is downgraded.

The government is asking investors to swap the $697 million of Empresa Mocambicana de Atum SA, or Ematum, debt due in 2020 with new fixed-rate sovereign notes that mature three years later. Mozambique has struggled to repay the debt because of a cash crunch brought about by a slump in commodity prices and a collapse in its currency.

Standard & Poor’s lowered the nation’s sovereign rating by four levels to CC on Tuesday, saying the conversion could be viewed as a default, while Moody’s Investors Service cut its assessment to B3 from B2, citing the government’s capacity to service outstanding loans and its deteriorating balance of payments. Investors have supported the government’s plan because it’s viewed as a fair exchange, with yields on the bond dropping to 16.77 percent on Wednesday from 19.12 percent on March 9, when Mozambique announced its offer.

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“The government is in the process of restructuring the Ematum bond, which should provide some freedom regarding foreign exchange in the country,” Hanns Spangenberg, a senior economist at NKC African Economics, based in Paarl, South Africa, said in response to e-mailed questions. “This is set to ease pressure on the metical. As such, inflation is expected to stabilize in the second quarter, and then trend downward.”

The metical plunged 32 percent against the dollar last year, the worst performer in Africa after Zambia’s kwacha. It was 3.2 percent stronger at 49.49 to the dollar at 1:03 p.m. in the capital, Maputo.

The debt restructuring, if it goes ahead, will reduce pressure on the central bank’s reserves, Spangenberg said. Details of the debt exchange, including pricing and the interest rate, will be announced on Thursday.

Exotix Partners LLP retained its buy recommendation on the Ematum bond, even as it said the period given for investors to switch debt was very tight. “The offer looks somewhat rushed, unnecessarily and unreasonably so,” it said in a note to clients.

Credit Rating

S&P’s move takes Mozambique’s credit rating to 10 levels below investment grade. Fitch put Mozambique’s B rating on a negative watch on March 11, saying the debt exchange could constitute a default.

Mozambique isn’t as constrained as other African nations that have sold global bonds. Mozambique spends about 1.5 percent of gross domestic product and 10 percent of government revenue on servicing debt, while in Ghana the ratios are 7 percent of GDP and as much as a third respectively, according to Mark Bohlund, an economist with Bloomberg Intelligence.

“It is not particularly fiscally constrained compared to peers,” he said by e-mail. “It should be kept in mind that the foreign participation in Mozambican financial markets is significantly lower than in Kenya, Zambia or Ghana, meaning that a rating downgrade would have a much lower economic impact.”

The government is seeking to bolster its financial position over the next decade through gas production in a country where recently discovered offshore reserves could help turn it into the third-biggest liquefied natural gas exporter. Anadarko Petroleum Corp. is among companies nearing final decisions on gas projects in the country.

Project Costs

A sovereign downgrade is bad news for future project-financing costs, according to Thea Fourie, an economist for sub-Saharan Africa at global risk adviser IHS Inc. With the current-account deficit remaining under pressure because of high debt costs, the currency will continue to be vulnerable, she said.

Mozambique’s current account gap, the broadest measure of trade in goods and services, is forecast at 45.3 percent of gross domestic product this year, the highest in the world after Libya and Tuvalu, according to International Monetary Fund data.

A weaker currency pushed inflation to 12.2 percent in February, with consumer prices shooting up by more than four percentage points in December. A drought in southern Africa has also worsened the inflation environment as food costs soar.

Mozambique’s central bank kept its benchmark interest rate unchanged on Monday following a 1 percentage-point increase in February that was aimed at combating inflation.

“Issues like the Ematum debacle only serve to add additional complications to investing in Mozambique at a time when foreign inflows are most needed,” said Spangenberg.

Source: Bloomberg