Mozambique: Floods killed nine in southern provinces - government
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Fitch Ratings has affirmed Mozambique’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC+’. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Substantial Credit Risk: Mozambique’s ‘CCC+’ rating reflects elevated government debt levels, weak public financial management, low GDP per capita, weak external finances, weak governance indicators and a challenging security situation. Robust medium-term growth prospects supported by the development of the liquefied natural gas (LNG) sector, the agreement of a three-year USD456 million Extended Credit Facility (ECF) with the IMF in 2022 and the concessional nature of public external debt with low service costs provide some support to creditworthiness.
Strong Economic Growth Ahead: Fitch expects Mozambique’s real GDP growth to remain strong relative to peers, averaging 4.5% over 2024-2025, from an estimated 5.9% in 2023. Strong economic momentum in 2023 was driven by the expanding output from ENI’s Coral South floating LNG project, which began production in 4Q22 and reached 90% of capacity in 3Q23. We assume the resumption of the construction of TotalEnergies’ onshore LNG project (Golfinho Atum) in 1H24, which we expect to have a positive effect on the real economy over our forecast period, through the use of domestically-supplied goods and services.
Growth Drives Government Debt Reduction: Fitch forecasts the general government debt/GDP ratio to decline to 93.6% at end-2024 and 90.2% in 2025, from 96.4% at end-2023, primarily driven by strong nominal GDP growth of 39% over the period. Our general government debt numbers include central government debt, the debt of the national hydrocarbons company (ENH), and loans related to the ‘hidden debt’ scandal (MAM and the remainder of the Proindicus loan).
Creditor Agreement Lowers Debt: The decline in general government debt partly reflects an off-court agreement between Mozambique and creditors from the Proindicus loan, one of the three SOEs involved in the “hidden debt scandal”. The government settled the portion of debt claimed by Credit Suisse and several commercial banks, amounting to a combined 82% of the total outstanding (USD987 million in principal and interest), in exchange for a USD143 million cash payment. This agreement resulted in a net 3.2pp reduction in our debt/GDP estimation for 2023.
Debt Management Shortcomings Persist: The government continued to accumulate external and domestic debt arrears through 2H23 and early 2024 due to capacity constraints. Between June and September 2023, authorities incurred external arrears amounting to a total USD2.5 million between IFAD, the African Development Bank and BADEA, all of which have been fully settled. Between 4Q23 and 1Q24, additional arrears were accumulated on bilateral debt service to Spain, India, China, Japan and Portugal (amounting to close to USD20 million).
Fitch understands that delays in the sovereign’s servicing of domestic debt also persist. The government missed coupon and principal payments on domestic bonds (maturities above one year) in 1H23, with all instances being subsequently resolved. Delays in both coupon and principal payments continued in 2H23, although the duration of the delays has shortened.
Fiscal Deficit Narrowing: Fitch estimates Mozambique’s fiscal deficit narrowed to 3.2% of GDP in 2023, from 5.2% in 2022, primarily reflecting the partial correction of the 2022 expenditure slippage resulting from the poor implementation of a new public sector wage scale. We estimate the expense on employees’ compensation to have declined by 1.8pp to 15.3% of GDP, reflecting measures such as a hiring limit, a 20% cut in public sector salaries, and the reduction of salaries and subsidies of public office holders.
We forecast the fiscal deficit to narrow further, to 2.6% in 2024 and 2.0% in 2025, mostly driven by an additional 1.2pp reduction in expense on employees’ compensation over the period, due to the cumulative effect of the hiring limit and strong nominal GDP growth. Interest payments will continue to increase due to expensive domestic financing, to 4.2% of GDP over 2024-2025, from 3.8% in 2023 and an average 2.9% during 2020-2022. Fitch expects LNG production to only have a meaningful impact on government revenue over the longer term due to the cost-recovery mechanism in contracts with concessionaries.
IMF Programme Supports External Financing: Mozambique’s satisfactory performance under the IMF’s three-year extended credit facility (ECF) supports the country’s capacity to meet its external commitments. The IMF completed the third review of the ECF programme in January 2024, with five of eight structural benchmarks and three of four quantitative performance criteria met as of end-2023. Performance under the programme will support concessional external disbursements, including from the IMF, the World Bank, and the Saudi Development Fund. The broader financing needs will also be met through issuance in the domestic bond market.
International Reserves to Stabilise: Fitch estimates Mozambique’s current account deficit (CAD) narrowed substantially to 10% of GDP in 2023, from 34% in 2022, largely reflecting a decrease in imports associated with megaprojects, following the import of Coral South’s floating LNG platform in 2022. The CAD will jump to 35% of GDP in 2024 and 38.5% in 2025, due to imports associated with Total’s Area 1 LNG project.
The impact of megaprojects on international reserves and Mozambique’s broader external stability is limited, as they are fully financed by financial account inflows (foreign direct investment and trade credits). We estimate Mozambique’s international reserves to have increased to USD3.1 billion in 2023 (from USD3.0 billion in 2022) and expect an increase to USD3.5 billion at end-2025. The increase in reserves will be driven by lower food and fuel import costs, a marginal contribution from LNG exports, and the resumption of Total’s Area 1 project.
General Elections Ahead: Parliamentary and presidential elections are scheduled to take place in October 2024. Fitch does not expect the outcome of the votes to lead to any meaningful reversal of the reforms implemented since the beginning of the IMF programme in 2022 or to cause any disruption to the development of megaprojects in the LNG sector. The security situation in northern Cabo Delgado region has improved since the deployment of Rwandan and SADC troops in 2021, but the insurgency remains to be fully supressed.
Declining Inflation: We forecast inflation to average 5.9% and 5.2% in 2024 and 2025 respectively, from an average 7.2% in 2023. Fitch expects lower inflation and monetary policy easing to support growth in the non-LNG economy. In January 2024, the central bank cut its key policy rate by 75bp to 16.5%, following a 400bp increase between January and September 2022 (to 17.5%). We expect an additional reduction by 150bp by the end of the year.
ESG – Governance: Mozambique has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World bank Governance indicators (WBGI) have in our proprietary Sovereign Rating Model. Mozambique has a low WBGI ranking at 21.4, reflecting the absence of a recent track record of peaceful political transitions, violence associated with the insurgency in the northern part of the country, relatively weak rights for participation in the political process, weak institutional capacity, uneven application of the rule of law and a high level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances: Stress in financing conditions, for example, due to reduced ability to access external financing sources and/or falling demand in the domestic government bond market, for example, as a result of a worsening fiscal position; and/or poor public finance management that could adversely affect payments to private sector creditors.
-External Finances: A significant decline in international reserves, for example, reflecting reduced access to external financing, a greater burden from LNG projects on the balance of payments than currently expected or development in the foreign-exchange market.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances: An improvement in public finance management, reflected, for instance, in a reduction in the accumulation of external debt arrears, accompanied by a continued decline in the government debt/GDP ratio.
-Macro: Greater confidence in medium-term growth prospects, through timely execution of the LNG megaprojects.
-External Finances: A significant increase in international reserves, for example, reflecting increased access to external financing and/or stronger export receipts, for example, from the nascent LNG sector.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Mozambique a score equivalent to a rating of ‘CCC+’ on the Long-Term Foreign-Currency IDR scale. However, in accordance with its rating criteria, Fitch’s sovereign rating committee has not utilized the SRM and QO to explain the ratings in this instance. Ratings of ‘CCC+’ and below are instead guided by the rating definitions.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
COUNTRY CEILING
The Country Ceiling for Mozambique is ‘B-‘, 1 notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
Fitch’s Country Ceiling Model produced a starting point uplift of 0 notches above the IDR. Fitch’s rating committee applied a +1 notch qualitative adjustment to this, under the Balance of Payments Restriction pillar reflecting the fact that capital controls exist, but they are limited and have not constrained the private sector’s ability to convert the metical into FC and/or transfer funds abroad. The prospects of receiving significant inflows of investment and financing to develop large gas reserves reduce incentives to introduce capital controls.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Mozambique has an ESG Relevance Score of ‘5’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Mozambique has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Mozambique has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Mozambique has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
Mozambique has an ESG Relevance Score of ‘4’for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Mozambique has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Mozambique has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Mozambique, as for all sovereigns. As Mozambique has a fairly recent restructuring of public debt in 2020, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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