Mozambique: Risk of failure in negotiations with creditors is increasing – consultant

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Mozambique: Risk of failure in negotiations with creditors is increasing – consultant

11:32 CAT | 21 Aug 2017

BMI Research consultancy believes that the risk that negotiations between public debt creditors and the Mozambican government will result in failure is growing, but still thinks an agreement will be reached.

“The strong position adopted so far by the Mozambican government suggests that there is a growing risk that negotiations on the restructuring of public debt securities between the two parties could come to nothing,” the Fitch Group analysts write.

In a report on Mozambique’s political risk, which Lusa had access to, analysts write that the consequences of a failure to reach the agreement both parties say they desire “would not represent a total collapse in economic growth, but there is likely to be an increase in the country’s political risk, and possible delays in the construction of essential infrastructure”.

Until resolution is reached, in addition to suffering negative credit ratings, Mozambique will also face “a limited budgetary position” constraining social spending, risking an increase in social instability.

In the short term, BMI Research believes that debt resolution will be the main preoccupation of the government, which has “refused to abandon the principle of equal treatment for all creditors”, namely holders of public debt securities issued in 2016 and creditors of loans to public companies contracted in 2013 and 2014.

This “strange decision” is one of the reasons behind BMI Research considering that the risk of not reaching an agreement is increasing.

“Investors have so far remained optimistic about an agreement, with interest rates on debt issues falling despite the failure to pay the January coupon, but we still believe that it is worth considering the possible ramifications if the two parties abandon negotiations without an agreement,” analysts say.

“Mozambique faces an increasingly challenging political risk environment, with high inflation and social cuts increasing the risk of large-scale popular instability,” the analysts write.

Among the country’s advantages, BMI Research highlights “abundant natural resources, particularly in coal and gas, and significant electricity production capacity,” which are still mitigated by the dependence of megaprojects, a low educational level of the population and the “huge foreign debt, which is around 110 percent of GDP this year”.

The government, they add, is likely to be forced to apply even more austerity if it is in fact able to renegotiate public debt, and corruption “remains a major problem and an obstacle to foreign investment”.

Source: Lusa