Financial ratings agency Standard & Poor’s has raised Mozambique’s rating to CCC+, after placing the country on Selective Default for one day, “to signal that there were payment defaults” earlier this year.
“Unfortunately, Mozambique did not have a grace period in the rules on domestic debt issues; if they are more than 5 days late it is a ‘default’ under our criteria, so as they exceeded five days in many cases, this led us to put the rating on SD [‘Selective Default’, in the original English], explained the director of sovereign ratings at S&P, Ravi Bathia.
Speaking to Lusa following the downgrade of the rating on local currency issues, from B- to SD, on Wednesday, and then rising to CCC+, on Thursday, one level below the rating it had at the beginning of the week, Ravi Bathia explained that the downgrade to SD was a signal sent to investors as a matter of transparency, to point out that Mozambique was late in making domestic debt payments between February and May, but that the situation has now been resolved.
“Subsequently, Mozambique has resolved the issue and they are paying within the due period, we see the problem resolved, and so we have taken them out of default again, but due to pressures on the financial system and inflationary and public spending pressures, we have put the rating for local currency issues at CCC+ because we still consider that difficulties remain, which Mozambique is resolving, and in a better position, and that is why we have upgraded the rating,” added the S&P director.
Mozambique thus saw the S&P analysis on domestic sovereign issues worsened by one level, from B- to CCC+, but kept unchanged the ‘rating’ relative to international issues, namely Eurobonds, on which there was no delay, therefore remaining at CCC+/C.
“On the foreign currency issues, they had some issues at the bilateral level, but they continued to pay in full and on time on the commercial debt commitments; We assess the capacity and willingness to pay the commercial debt, but in the case of the bilateral, even if they are delayed, this does not imply a move in the rating,” the analyst explained.
Asked why S&P downgraded the rating from B- to Selective Default for a day, and then upgraded it to CCC+, one notch below the initial level, Ravi Bathia replied, “We wanted to point out that payments were missed between February and May, we wanted to reflect this to investors for the sake of transparency; we put it on SD to reflect that payments due were missed, but we don’t have to stay on SD for long, it was a matter of showing that there were payment failures. You only have to go to SD for one day for the sake of transparency.”
Asked why the rating was revised from ‘default’ to a level below where it was, the analyst argued that the macroeconomic situation has changed since the last assessment.
“We still feel, even though it has been resolved, that there are issues about the payment system that may have been addressed earlier,” he argued, adding that there were other factors: “inflationary pressures increase costs in the system, in wages and other lines of defence, the authorities face fiscal tightening which reduces the amount of money available for debt repayment, even in the domestic market.”
On the importance for the economy of investments in the large natural gas projects in the north of the country, the analyst responsible at S&P assumes that they are fundamental to transforming the Mozambican economy, and therefore concludes that until the projects become operational and the gas begins to be exported, the country’s macroeconomic situation will not change substantially.
“From now on, until we see the big gas projects up and running, budgetary pressures will continue and this affects the rating of the local currency,” he concluded.