Moody’s places Mozambique’s Caa1 ratings on review for downgrade – Unabridged

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Moody’s places Mozambique’s Caa1 ratings on review for downgrade – Unabridged

9:58 CAT | 21 May 2016

New York, May 20, 2016 — Moody’s Investors Service has today placed Mozambique’s Caa1 government bond and issuer ratings on review for downgrade.

The purpose of the review is to assess the consequences for debt holders of recent revelations of previously unreported public external debt denominated in foreign currency. In particular, the review will allow Moody’s to assess the likelihood that a restructuring of debt issued or guaranteed by the government of Mozambique will take place in order to attempt to alleviate pressures on its finances and the country’s external position or to allow the government to retain access to multilateral and bilateral facilities.

Ratings rationale

Ratinale for intiating a reviwe for downgrade of Mozambique’s Caa1 ratings

The government of Mozambique recently disclosed $1.4 billion in previously unreported public debt. On 28 April 2016, Mozambique’s Prime Minister announced that public sector debt had grown to $11.6 billion at the end of 2015, or 89% of GDP (when debt stock and GDP are expressed in local-currency terms). General government debt numbers are not available but Moody’s estimates that it now exceeds 70% of GDP versus 60% previously. The newly-identified debt is comprised of USD-denominated loans with an estimated 7 year average maturity, granted by foreign banks to government-related bodies, with a sovereign guarantee. Since the debt appears to have not been reported in the country’s external debt, this measure will likely be revised upward as well.

As a consequence of the debt disclosure, aid disbursements to Mozambique, including from the International Monetary Fund, the World Bank and the UK government, were suspended. Mozambique received $1.5 billion (10% of GDP) in total aid support last year. Aid took the form of grants, bilateral and multilateral loans to the government and disbursements under the $283 million IMF credit facility to the central bank to bolster foreign exchange reserves.

The revelation of previously unreported debts has undermined the government of Mozambique’s creditworthiness. Government debt levels are now higher than previously assumed, and pressures on its cashflow and on the country’s balance of payments are more severe, with foreign currency debt service costs greater than previously assumed. Any litigation initiated in relation to the April 2016 EMATUM notes exchange as a consequence of these revelations would add to the uncertainties around the implications for government finances. As part of its review, Moody’s will seek a better understanding of the full extent of the government’s direct and contingent liabilities in order to assess its capacity and willingness to service them going forward.

Moody’s will also seek a better understanding of the actions the government might choose or be encouraged to take in order to address external liquidity pressures and to avoid a prolonged suspension in aid disbursements which would otherwise intensify those pressures. In particular, Moody’s will assess the risk that the government will restructure or acquiesce in the restructuring of any government or government-guaranteed debt, either as a condition for continuing external support e.g. under an IMF programme, or as an independent policy decision. The review will also allow Moody’s to assess the veracity of recent press reports suggesting that the government of Mozambique will not honour its guarantees on recently disclosed obligations.

In the meantime, Moody’s expects the government to increasingly rely on domestic sources of funding, in local currency. This could ultimately exacerbate downward pressures on the exchange rate and the central bank’s foreign exchange reserves and be detrimental to inflation (due to import pass-through among other things). Inflation reached 10.6% in December 2015 while the Mozambican metical depreciated against the USD by 26% over 2015, and about 15% since the beginning of 2016. Foreign exchange reserves fell to $2.1 billion in February 2016 from $3.2 billion in mid-2014, and are expected to continue falling substantially over the next two years based on the current trend.

What could result in a downgrade

Moody’s would downgrade Mozambique’s Caa1 ratings if the review were to conclude that the risk of a debt restructuring and the likely losses to investors have risen to a level inconsistent with a Caa1 rating. In that event, the magnitude of the downgrade would reflect Moody’s updated assessment of the probability of default and loss given default.

What could stabilize the ratings at the current level

Moody’s would likely confirm Mozambique’s current Caa1 ratings if the review for downgrade were to conclude that the government is likely to be able to obtain the necessary external financing to meet its external debt service needs without resorting to a restructuring.

GDP per capita (PPP basis, US$): 1,165 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.3% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 11.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -6% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -37.9% (2015 Actual) (also known as External Balance)

External debt/GDP: 93% (2015 Estimate)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 19 May 2016, a rating committee was called to discuss the rating of the government of Mozambique. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has materially decreased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

Source: moodys.com