Overview
- The Mozambican government has completed a distressed debt exchange.
- Following the completion, we are raising our foreign currency long- and short-term ratings on Mozambique to ‘CCC+/C’ from ‘SD’ (selective default) and affirming the local currency ratings on the country at ‘B-/B’.
- The stable outlook balances our view of the risks associated with large twin deficits against the improving economic growth prospects over the next 12 months, supported by large investments in extractive sectors.
Rating Action
On Nov. 22, 2019, S&P Global Ratings raised its long- and short-term foreign currency sovereign credit ratings on Mozambique to ‘CCC+/C’ from ‘SD’. At the same time, S&P Global Ratings affirmed its ‘B-/B’ long- and short-term local currency sovereign credit ratings on the country. The outlook is stable.
As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on the Republic of Mozambique are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see “Calendar of 2019 EMEA Sovereign, Regional, and Local Government Rating Publication Dates: Midyear Update,” published July 2, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the Mozambique government’s announcement of completion of a distressed debt exchange. The next scheduled rating publication on the sovereign rating on the Republic of Mozambique will be determined in the 2020 calendar.
Outlook
The stable outlook balances the risks associated with large twin deficits against the improving economic growth prospects over the next 12 months, supported by large investments in extractive sectors.
We could consider raising the ratings if we observe significant improvements in fiscal and external positions against our base-case assumptions.
We could lower the ratings if we believe that another distressed exchange or difficulties in Mozambique’s external financing requirements by public and private sectors have become more likely.
Rationale
This upgrade reflects the completion on Oct. 30, 2019, of Mozambique’s distressed debt exchange. The government exchanged its $726 million notes due 2023 with $900 million notes due 2031. The 2023 notes had been in arrears and not serviced since January 2017. The new US$900 million notes are fixed-rate amortizing notes maturing on Sept. 15, 2031, with eight equal amortisations starting in 2028. The notes have a step-up coupon beginning at 5% per year and rising to 9% in 2024.
Under our criteria, we view a default under a distressed exchange as cured upon the completion of an exchange offer, even if nonparticipating creditor debt remains unpaid (see “Argentina Emerges from Default, Although Some Debt Issues Are Still Rated ‘D’,” published June 1, 2005). At that point, we set the sovereign rating as our forward-looking assessment of the probability that the sovereign will pay its debt in full and on time.
Despite the completion of the debt exchange, the Mozambique government still faces a high debt burden exceeding 100% of GDP and yet to be resolved litigations on debt owed by two non-financial public enterprises. Pending lawsuits relate to two external commercial loans, totaling close to $1.2 billion, extended to Mozambique asset management company (MAM) and Proindicus-both government-owned enterprises, reportedly with government guarantees. Both loans and key individuals involved in executing the agreements are subject of legal cases in the U.S. and U.K.
In December 2018, the U.S. Department of Justice launched a lawsuit against individuals who were allegedly involved in misappropriation of funds related to the two loans. On the other hand, the government is pursuing the nullification of the obligations tied to these loans in the U.K. courts. If the courts were to rule in favor of the Mozambican government, we would see no further risks arising from those obligations. However, if the courts were to decide against Mozambique, the loans could become direct obligations of the government, likely requiring further debt restructuring.
Nevertheless, we did not rate or assess the validity and timeliness of the guarantees on the loans to Proindicus and MAM. We are therefore unable to opine on whether these constitute financial obligations of the guarantor under our criteria, and consequently whether the guarantor’s failure to honor a payment under the guarantees would constitute a default on its financial obligations.
The ‘CCC+’ foreign currency rating on Mozambique reflects our forward looking opinion on Mozambique’s creditworthiness, following the recent debt restructuring. In our view, Mozambique is currently still vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments. While its financial commitments appear to be ultimately unsustainable, we think that Mozambique might not face a credit or payment crisis within the next 12 months.
The ratings continue to be constrained by low GDP per capita, weak governance and institutions, large twin external and fiscal deficits, and a large debt burden.
Institutional and economic profile: Weak transparency in government policymaking still weigh on institutions and economic growth
- In our view, institutional governance is weak, exemplified by poor transparency regarding external debt build up.
- Following the weak economic performance in 2019 due to the impact of cyclones, in 2020, we expect economic growth to be higher.
- While GDP per capita is very low, growth prospects are strong, supported by liquefied natural gas (LNG) sector investments taking off.
In our view, rapid government debt accumulation, the absence of debt disclosures, and the lack of checks and balances for accountability reflect Mozambique’s weak institutional oversight, and lack of transparency and accountability. These weaknesses have resulted in loss of budgetary support and external financing by development partners. However, we view the recent completion of debt exchange as a step toward improving Mozambique’s prospects for access to external financing and budgetary support. The IMF, which suspended its policy support program in April 2016, still provides the country with technical assistance and, following the recent debt exchange it has acknowledged positive developments in improving debt sustainability. Governance improvements and predictability of policymaking could be further enhanced by resolving the outstanding dispute regarding two loans to MAM and Proindicus.
Despite the peace deal among the two opposing parties, the risk of reignited domestic conflict persists. Frelimo, the ruling party, and the opposing Renamo party have maintained fairly stable relations since they agreed to a ceasefire in early 2017. In August 2019, the two parties reached a peace deal that includes further administrative decentralisation and incorporating former Renamo fighters into the official army. Subsequently, in October 2019, Frelimo won the general elections with an increased majority of 73% of the votes, 184 seats in the 250-seat National Assembly, with Renamo contesting the validity of the process and results. The election outcome could hinder the peace deal’s progress, in our view.
This year’s economic performance has been significantly and negatively affected by two tropical cyclones. Idai and Kenneth hit Mozambique in March and April 2019. As a result, agriculture and electricity output are likely to be weak for the year due to damage to crops and infrastructure, including Beira port, a major port for commodity exports. Consequently, we expect real GDP growth will only average 2.5% in 2019. To cushion the cyclones’ adverse impact, in April 2019, the IMF executive board approved US$118.2 million, under Rapid Credit Facility Assistance, for losses incurred during the disasters.
We expect real GDP growth to pick up in 2020 due to the country’s reconstruction efforts and investments in extractive industries. Major development projects, mostly in the gas and coal industry, will commence in 2020, with gas production expected to start in 2023-2024. Liquefied natural gas (LNG) projects will significantly improve Mozambique’s export mix and boost its economy once completed, but most benefits will materialize beyond our forecast horizon. Total, a French company, acquired Anadarko’s assets in September 2019 and will lead a consortium developing the $25 billion onshore Area 1 LNG project. The consortium signed an agreement with the Mozambican government that paves the way for the LNG project and the construction of an export terminal in the country. We also understand that the consortium has lined up enough customers for the LNG it plans to produce.
If materialised, the investment could benefit Mozambique’s economic outlook, which is in terms of our economic assessment constrained by very low GDP per capita in a global comparison, at less than US$500 in 2019.
Flexibility and performance profile: Large current account and fiscal deficits will continue until significant LNG projects come on stream
- Current account deficits remain very wide due to weak export performance and imports related to LNG investment projects.
- Despite the recently completed debt exchange, government debt stock remains high while fiscal deficits will likely consolidate more slowly to expenditure related to disaster management tied to the recent large cyclones and elections.
- The central bank pursues a managed floating exchange rate regime and inflation is relatively low.
For 2019, we estimate that Mozambique’s sizable current accounts deficit will remain close to 30% of GDP. The wide deficit stems from increased imports of consumer goods, capital goods and services related to large investment projects, and reconstruction-related goods and services. On the other hand, a faster increase in exports has been constrained by low international prices for its main exports coal and aluminium, while electricity exports have been negatively affected by the effects of the two cyclones, which reduced hydroelectric supply.
The LNG projects are reaching financial closure, so we expect that imports volumes will continue to increase with the construction of the LNG trains. Conversely, exports of coal and aluminium are likely to remain flat. Consequently, we expect the current account deficit to widen, to close to 40% of GDP by 2022 from 30% of GDP this year. Since the external deficits are largely driven by investments, at least two-thirds of the funding relies on inward foreign direct investment. External debt accumulation by both public and private sectors covers the remaining funding gap. In the public sector’s case, it is bilateral and multilateral concessional loans. Consequently, external liabilities emanating from foreign direct investment (FDI) inflows and debt accumulation remain large. While Mozambique is still working on improving governance, transparency, and accountability, external funding to the government remains limited until donor requirements are met. The lack and quality hamper our analysis of external and fiscal data. Fiscal and external debt statistics are revised frequently with material changes. However, the IMF’s technical missions are working with the government to improve quality of reporting and statistics.
In our view, Mozambique is a low-income economy facing shortfalls in basic services and infrastructure, constraining the already limited fiscal leeway of the government. Although the government has undertaken substantial spending cuts in 2019, we believe the fiscal deficit as a percentage of GDP will still widen to 6.5%, driven by expenditure related to the elections, the reconstruction efforts, and support to local communities after the two cyclones. We expect that, absent the expenditure in 2019 related to elections the cyclones, along with improvements in tax revenue administration and collections, the fiscal deficits will decline and average about 5% of GDP over 2020-2022.
Due to large fiscal deficits, we expect that government debt-to-GDP ratio will increase this year to 116%. However, in 2020-2022, debt to GDP is likely to decrease due to our assumptions of gradually lower deficit fiscal consolidation and rising nominal economic growth, which could reduce the debt burden to below 110% of GDP by 2022.
We estimate that over 80% of the government’s debt stock is in foreign currency and nonresidents hold the vast majority of commercial debt. We also estimate that net general government debt will remain close to 100% of GDP though 2022 and interest payments will remain above 15% of general government revenue. We expect the government’s high annual financing needs to be met partially by bilateral project-related external funding, but for the most part to be financed in local currency by domestic banks.
In our view, the Mozambique central bank pursues a managed floating exchange rate system. The bank has been limiting its interventions in foreign exchange markets, in line with the IMF’s recommendations. For 2019, inflation is low and stable averaging 3%. The central bank’s monetary policy committee left its benchmark rate (MIMO) unchanged at 12.75% in October 2019, after two rate cuts earlier in the year. The Mozambican metical substantially depreciated during the first four months of 2019 against both the U.S. dollar and the South African rand, most notably due to the impact of the two cyclones. Although risks remain high owing to a large current account deficit, the currency stabilised thanks to a decline in international oil prices, accommodative monetary policy, and international aid inflows.
Key Statistics
Table 1
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A–Not applicable. CARs–Current account receipts. FDI–Foreign direct investment. CAPs–Current account payments. e–Estimate. f–Forecast. MZN–Mozambican metical. The data and ratios above result from S&P Global Ratings’ own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings’ independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Ratings Score Snapshot
Table 2
S&P Global Ratings’ analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings’ “Sovereign Rating Methodology,” published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings’ sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
