Mozambique: Ratings downgrade shows country’s substantial credit risk – consultants

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Mozambique: Ratings downgrade shows country’s substantial credit risk – consultants

9:37 CAT | 27 Jun 2023

in file CoM

The consultancy Oxford Economics Africa said on Monday that the recent downgrade of Mozambique’s rating by Standard & Poor’s shows that the country’s credit still has “substantial risk” due to debt and poor governance, among others.

“Although Mozambique’s rating has somewhat recovered from S&P and Fitch’s financial default levels in the wake of the hidden debts scandal in 2016, the country still has substantial credit risk; this is due to the high level of public debt, above 100% of GDP, extremely high costs to service the debt, unresolved weaknesses in public enterprises related to the hidden debts scandal, poor governance indicators and the insurgency in Cabo Delgado,” the analysts write.

In a commentary on the recent downgrade of the ‘rating’ for local currency issues by S&P last week, the Africa department of Oxford Economics also points out that “the government faces high spending pressures due to lack of development and the humanitarian crisis caused by climate disasters, diseases such as cholera or malaria, and violent conflict, which limits the ability to service debt.”

In the analysis, Oxford Economics says that “if there are further delays over the next 12 months in natural gas projects in Cabo Delgado, this will likely result in a downgrade,” but stresses that this is not the most likely scenario.

The base scenario, for these analysts, is that the gas projects will resume in the second half of this year and that “there will be a massive increase in exports from 2027, which will give some relief to public finances and help Mozambique avoid a default.”

Last week, S&P downgraded local currency debt issues to ‘default’, for 24 hours, to reflect the delays in payments that existed between February and May, and then removed the rating from the default level, leaving it one level below what it was before it fell to ‘default’.

In an interview with Lusa following these rating actions, director of sovereign ratings at S&P, Ravi Bathia, explained that the downgrade to SD was a signal sent to investors as a matter of transparency, to signal that Mozambique was late in making domestic debt payments between February and May, but that the situation has now been resolved.

“Subsequently, Mozambique has resolved the issue and they are paying within the due period, we see the problem resolved, and so we have taken them out of default again, but due to pressures on the financial system and inflationary and public spending pressures, we have put the rating for local currency issues at CCC+ because we still consider that difficulties remain, which Mozambique is resolving, and in a better position, and that is why we have upgraded the rating,” added the S&P director.

Mozambique thus saw S&P’s analysis of domestic sovereign issues downgraded by one level, from B- to CCC+, but kept its rating on international issues unchanged, namely Eurobonds, on which there was no delay, therefore remaining at CCC+/C.

Source: Lusa