A large financing agreement for one of Mozambique’s large LNG projects shows continued progress on project implementation despite security challenges and lower medium-term hydrocarbon prices, raising the prospect of significant positive effects on Mozambique’s growth and public finances in the longer run, Fitch Rating says.
Total SE (AA-/Stable), whose Mozambican subsidiary is the operator of the LNG project related to the development of the Golfinho and Atum gas fields, announced on 17 July 2020 it secured a US$14.9B financing (98% of Mozambique’s 2020 GDP). The funding was sourced from a mix of export-credit institutions, commercial banks and the African Development Bank (US$400M). The project requires overall investment of US$20B (132% of Mozambique’s GDP) and involves the construction of two gas liquefaction trains, the first of which is scheduled to come on stream in 2024.
However, delays could occur for example if global energy companies’ capital budgets are reduced further due to further changes in long-term energy price assumptions energy prices or if security risks cause operational interruptions. Terrorist attacks in the northern province of Cabo Delgado, where the projects are located have increased in recent months. Although LNG facilities have not yet been directly attacked, contractors for Total were targeted in June 2020.
While the Total project is moving forward, the decline in global energy prices and need to cut investment globally led ExxonMobil, leader of a separate US$30B (around 200% of GDP) project related to the development of the onshore Mamba field, to postpone its final investment decision to next year. This will delay the start of production of the two onshore trains by one or two years, which would delay the start of production to around 2025-2026. The third LNG project (US$8B) in the Coral South field, led by Eni SpA (A-/Stable), for which a final investment decision was made in 2017, is unaffected with production scheduled for late 2023, although delays cannot be ruled out.
The LNG production from the three projects is expected to have a significant effect on growth in the medium-term. The combined capacity of the three projects is roughly equivalent to twice the size of Mozambique’s 2020 GDP. Fiscal benefits would start to emerge only well after production commences as LNG development costs are likely to offset the rise in government LNG revenues for at least five years. In addition, the interest rate on Mozambique’s restructured Eurobond (USD900 million) will increase to 9% in 2023 from 5% currently.
The implementation of the LNG projects, which require large imports of capital and intermediate goods, is generating extraordinarily large current-account deficits (CADs). We project the CAD to deteriorate to 64% of GDP in 2020 from 21% in 2019. The CAD related to mega projects (including indirect effects) is expected to be 50% of GDP in 2020, rising to 56% in 2021 and 70% in 2022, with an overall CAD of 68% and 80% respectively. The CAD is essentially financed by foreign direct investments (FDI) and private loans, mostly directed towards the LNG projects (around 50% of GDP in total in 2020), by government and bank borrowing (around 7% of GDP in 2020) and by drawing down on international reserves.
In the short-term, Mozambique is facing substantial credit risks, which are reflected in its ‘CCC’ rating. Fiscal and external financing needs are high as the hit to public and external finances due to the pandemic related shock came as the country was still recovering from the devastating effects of the two cyclones that hit the country in 2019. These risks are compounded by high levels of general government debt (106% of GDP in 2020) and the unresolved liabilities of state-owned-enterprises Proindicus and MAM.
Source: Fitch Ratings via Club of Mozambique