Mozambique LC ratings temporarily lowered to ‘SD’ on delayed payments; ‘CCC+’ FC ratings affirmed

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Mozambique LC ratings temporarily lowered to ‘SD’ on delayed payments; ‘CCC+’ FC ratings affirmed

10:12 CAT | 22 Jun 2023

File photo: Reuters

Overview

Mozambique’s government made late payments on long-term, local currency (LC) commercial debt between February and May 2023, constituting a selective default (SD) according to S&P Global Ratings’ Definitions.

We temporarily lowered our LC sovereign credit ratings on Mozambique to ‘SD/SD’ from ‘B-/B’.

The missed payments have been cured since payments on local currency debt resumed in full in May. According to our processes, we will wait one business day and then raise the long- and short-term LC sovereign credit ratings on Mozambique, most likely to ‘CCC+/C’.

We affirmed our ‘CCC+/C’ foreign currency (FC) sovereign credit ratings on Mozambique.

The outlook on the FC rating remains stable (we do not assign an outlook to an ‘SD’ rating).

Rating Action

On June 20, 2023, S&P Global Ratings lowered its long- and short-term LC sovereign credit ratings on Mozambique to ‘SD/SD’ from ‘B-/B’. We also affirmed our FC long- and short-term sovereign credit ratings at ‘CCC+/C’. The outlook on the FC rating remains stable.

We maintained our transfer and convertibility assessment at ‘CCC+’.

As a sovereign rating (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on Mozambique are subject to certain publication restrictions set out in article 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see “Calendar Of 2023 EMEA Sovereign, Regional, And Local Government Rating Publication Dates,” published Dec. 22, 2022, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the late payments made on government debt. The date of the next scheduled review is Oct. 20, 2023.

Outlook

We do not assign outlooks to SD ratings.

The stable outlook on the FC rating reflects the balance between our view of Mozambique’s ability to meet its financial obligations in the next 12 months, and uncertainties as to when significant liquefied natural gas (LNG) production will commence and the associated revenue will become available to the government. Significant delays in this regard could undermine the government’s ability to meet its commercial obligations over the medium term (particularly its 2031 Eurobond).

Downside scenario

We could lower the long-term FC ratings over the next 12 months if we assess that additional economic or external shocks, or further delays to large gas projects, are likely to make the government less willing or able to service its commercial debt obligations in a timely manner.

Upside scenario

We could raise the ratings if we were to expect government revenue to increase materially, perhaps due to a sharp rise in gas production, reducing the risk of further delayed payments to creditors or of a distressed restructuring of Mozambique’s 2031 Eurobond.

Rationale

We lowered our sovereign LC credit ratings on Mozambique to ‘SD’ following late payment of principal and interest on domestic commercial debt (treasury bonds), over February-May 2023. During this period, the government delayed payment beyond the due date on some of its LC long-term debt by nine days on average, and in some instances, by up to three weeks, but full information on this became available with a delay.

In the absence of stated grace periods as per S&P Global Ratings Definitions, to avoid default, payments are required to be made within five business days of the due date. We therefore consider the delayed payments on the LC long-term debt a default.

Cyclone Freddy, which was active in late February to early March, exacerbated an already weak fiscal position in Mozambique, increasing government spending requirements for humanitarian aid. However, the default continued for a period well beyond that of the weather event. We understand that cash was available for debt service and payment systems continued to function.

Total late payments on LC debt over the February-May period amounted to Mozambique metical (MZN) 9.4 billion ($148.6 million) with around 11 institutions not receiving timely payment; details relating to late payments were not fully publicly available during that period.

Over the same period, Mozambique also delayed external debt payments to some noncommercial, bilateral, and multilateral creditors, which we do not consider a default according to “S&P Global Ratings Definitions.” We affirmed our long-term FC sovereign issue ratings at ‘CCC+’ because the government has remained current on capital and interest payment on its foreign currency commercial debt obligations. We understand Mozambique’s Eurobond holders received coupon payments in full and on time on March 15, 2023.

Mozambique–Ratings Score Snapshot

Key rating factors and score explanation:

Institutional assessment – 6

Weak governance institutions resulting in an uncertain policy environment, including diminished capability and willingness to maintain timely debt service. Debt payment culture is weak, as demonstrated by accumulation of external commercial arrears in 2007-2017 and delayed payments on local currency debt in February-May 2023.

Economic assessment – 6

Based on GDP per capita (US$) and growth trends as per Selected Indicators in Table 1.

External assessment – 6

Based on narrow net external debt and gross external financing needs/(current account receipts + useable reserves) as per Selected Indicators in Table 1. Loss of access to international capital markets following the debt crisis. There is a risk of marked deterioration in the cost of, or access to, external financing, due to a much weaker external position. The sovereign’s external data lack consistency as demonstrated by material data mismatches of balance of payments and national income accounts data.

Fiscal assessment: flexibility and performance – 6

Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. The sovereign faces shortfalls in basic services and infrastructure, as reflected by its low ranking on the U.N. Development Programs’ human development index.

Fiscal assessment: debt burden – 6

Based on net general government debt (% of GDP) and general government interest expenditure (% of general government revenues) as per Selected Indicators in Table 1. Over 70% of government debt is denominated in foreign currency. Nonresidents hold over 60% of government commercial debt (including Eurobonds). The banking sector’s exposure to the government exceeds 20% of its assets.

Monetary assessment – 5

The exchange rate regime is a managed float. Independence of monetary authority is limited although improving. The sovereign’s weak transmission mechanism is underpinned by low financial intermediation.

Indicative rating – b-

As per Table 1 of “Sovereign Rating Methodology” and “General Criteria.”

Notches of supplemental adjustments and flexibility – 0

We apply the adjustment factor for a cap at ‘B+’ which is applicable when the institutional assessment is at ‘6’ and debt is at ‘5’ or ‘6’.

Final rating

Foreign currency CCC+

The final rating is based on “General Criteria: Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, And ‘CC’ Ratings.”

Notches of uplift 0

Local currency SD

Delayed payments on LC debt are considered a selective default as per S&P Global Ratings’ Definitions.

S&P Global Ratings’ analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings’ “Sovereign Rating Methodology,” published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings’ sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Source: S&P Global Ratings