IMF conditions for financial aid are a negative for Mozambique’s rating – Moody’s

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IMF conditions for financial aid are a negative for Mozambique’s rating – Moody’s

12:25 CAT | 07 Jul 2016

A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McDermid

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The conditions identified by the International Monetary Fund (IMF) for the resumption of financial aid to Mozambique comprise a negative for the analysis of the country’s sovereign credit because they imply that other international donors will wait for the satisfaction of these conditions before resuming aid themselves, says Moody’s.

“The IMF said at the end of its visit to Mozambique that the country would have to meet several conditions before talks on the resumption of disbursements of the US$283 million loan agreed in December 2015 could start,” Moody’s analysis of the economic situation of the country reads.

These developments, says the rating agency, “are negative from the standpoint of the analysis of Mozambique’s sovereign credit because the resumption of donor disbursements in addition to the IMF, like the World Bank, the United Kingdom and the United States, is linked to the satisfactory resolution of the public debt’s transparency problems”.

Mozambique, which has a Caa1 rating – below the level of buy recommendation and on review for a possible lowering – revealed undeclared debts of more than US$1.4 billion dollars in April, leading to a wave of mistrust on international financial markets and raising debt interest rise from just over 12 percent to nearly 20 percent since April, the highest in Africa and comparable with Venezuela’s.

“Foreign aid is an important source of foreign currency for the government of Mozambique and the country as a whole,” Moody’s says, noting that aid is equivalent to about 10 percent of GDP.

The conditions outlined by the IMF for the resumption of talks about financial aid include more effective implementation not only of macroeconomic adjustment measures, but also of measures to increase transparency, improve governance, and ensure accountability.

Specifically, the IMF wants an external audit of the accounts of the public companies involved in the so-called ‘hidden debts’ scandal, but warns that “the measures aimed at improving the transparency of public accounts […] will probably take several months or even a year”. Moody’s concludes therefore that “the Mozambican authorities will need time to meet the IMF’s conditions for resuming talks that will ultimately unlock the financing”.

With a reduction of foreign investment by 35 percent in the first quarter of this year, the lack of foreign aid “will exacerbate external challenges and make the task of addressing the economic imbalances even more complicated”.

Mozambique economic indicators since July 2014 have revealed the seriousness of the situation, says Moody’s, pointing to the depreciation of the metical by 43 percent against the dollar by April this year, inflation rising to 17.3 percent compared to 2 percent a year earlier, and the decline in external reserves from US$3.2 billion to only 2 billion.

Economic growth has also slowed, to 5.3 percent in the first quarter, and confidence indicators released by the Bank of Mozambique also show deterioration.

Source: Lusa