Metical falling, public debt on the rise

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Metical falling, public debt on the rise

3:05 CAT | 28 May 2019

Photo: O País

The strong depreciation of the metical against the main foreign currencies circulating in the domestic market could worsen the levels of unsustainability of public debt between 2019 and 2021, according to projections by the Ministry of Economy and Finance.

The Mozambican currency, the metical, has long been losing value against the US Dollar, the Euro and the Rand. This situation, according to the Ministry of Economy and Finance (MEF), worsens the risk of public debt sustainability, currently above 100% of the gross domestic product (GDP).

The assumptions of the Medium Term Fiscal Outlook published by the MEF and covering the period from 2019 to 2021, indicate that a 1% depreciation in the exchange rate corresponds to an increase of 2 percentage points (pp) in the external debt to GDP ratio.

The report stresses that public debt is the most sensitive to exchange rate fluctuations, given that, in 2017, 84% of the total debt portfolio was contracted in foreign currency.

“An exchange rate shock may have adverse effects on private consumption, investment and the real sector, through higher production costs for the sectors that depend on the importation of raw material. On the other hand, exchange rate fluctuations may negatively impact the balance sheets of state-owned companies through changes in the valuation of liabilities in other currencies,” the MEF report on the medium-term fiscal risks, to which ‘O Pais’ has had access, reads.

The evolution of foreign exchange shock caused the debt level in 2016 to reach 126.7% of GDP. This exchange rate impact was most evident with metical depreciation, at a time when the Mozambican currency lost about 63% of its value against the US dollar. In turn, in 2017, the appreciation of the metical against the US dollar was equivalent to a reduction by 14 percentage points of the GDP in external debt.

These data suggest that the Mozambican debt portfolio is changing rapidly to a scenario of higher risk, lower maturity (four years) and higher interest rates (18%).

“This change in composition is a risk that requires constant monitoring in 2019. At the same time, there is a concentration of payments in specific periods which may put pressure on the public treasury,” the Ministry report concludes.

By Edson Arante

Source: O País