Fitch places Mozambique UCO on Final Sovereign Rating Criteria

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Fitch places Mozambique UCO on Final Sovereign Rating Criteria

2:40 CAT | 18 Jul 2022

Image: Lusa

Fitch Ratings has placed Mozambique’s ‘CCC’ Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and debt instruments Under Criteria Observation (UCO) following the conversion of the agency’s exposure draft of its Sovereign Rating Criteria to final criteria.

The financial rating agency Fitch Ratings will review the criteria for assigning the CCC rating to 11 countries, including Mozambique, and may maintain, raise or lower the rating by one level in the next six months.

“Fitch Ratings has placed Mozambique’s ‘CCC’ Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and debt instruments Under Criteria Observation (UCO),” a note released by the financial rating agency reads, while stressing that the country’s current rating remains so far unchanged.

“The UCO indicates that ratings may change as a direct result of the final criteria. It does not indicate a change in the underlying credit profile, nor does it affect existing Outlooks,” Fitch Ratings writes.

The analysis will take place “within six months”, and “the outcome will depend on Fitch’s assessment of the appropriate notching based on the new criteria”, and may remain as is, go up or go down.

“Due to the introduction of the +/- modifiers in the ‘CCC’ category, 11 sovereigns currently rated ‘CCC’ (Long-Term Foreign-Currency Issuer Default Rating (LT FC IDR) and Long-Term Local-Currency (LT LC) IDRs: Argentina, Republic of Congo, Ethiopia, Laos, Mozambique, Tunisia and Ukraine; LT FC IDR only: El Salvador; and LT LC IDR only: Sri Lanka, Zambia, and Belarus) could experience a one-notch rating change, potentially migrating from ‘CCC’ to ‘CCC-’ or ‘CCC+’,” Fitch reports.

Fitch Ratings’ last assessment of Mozambique’s debt was made on March 11, 2022, with the agency deciding to keep the rating at CCC while forecasting growth of 4.5% this year and 8% in 2023 and a decline in public debt to 104.5% of GDP.

READ: Fitch affirms Mozambique at ‘CCC’

“Mozambique’s ‘CCC’ rating reflects elevated government debt levels, limited sources of financing combined with high fiscal and external financing needs, still unresolved public-sector debt liabilities, low GDP per capita, weak governance indicators, a difficult security situation and vulnerability to natural disaster,” a note released at the time read.

The CCC level, three levels above the Financial Default (‘default’), means that “default is a real possibility”, according to the rating agency’s methodology.

Mozambique’s debt-to-GDP ratio, Fitch says, is expected to remain high, despite the downward trend from 112.4% at the end of 2021 to 104.5% this year, and a forecast of 97.6% in 2023.

Still on the public debt ratio, one of the highest in sub-Saharan Africa, Fitch Ratings again warns that adherence to the Common Framework in addition to the Debt Service Suspension Initiative (DSSI), created by the G20 in April 2020, would cause the country to enter ‘default’.

“The Government has not yet taken a decision on joining the Common Framework beyond the DSSI, which we see as a distinct possibility; comparable treatment by private creditors should be one of the requirements of the agreement, which could affect the issuance of debt maturing in 2031, and Fitch would likely view debt restructuring to private sector creditors as a ‘problematic debt swap’ and, consequently, a ‘default’,” the analysis concludes.

Source: Lusa