Mozambique: State business sector needs “constant monitoring”

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Mozambique: State business sector needs “constant monitoring”

1:09 CAT | 17 Jun 2020

Photo: O País

The Risk Management Office (GGR – Gabinete de Gestão de Risco) of the Ministry of Economy and Finance says that Mozambique’s state business sector must be recognised as one of the most explicit and implicit “potential sources of fiscal risk”, and needs to be “constantly monitored”.

The explicit component is associated with the growing burden on the State Budget in direct transfers, subsidies, retrocession agreements, guarantees and endorsements.

The implicit component, according to the GGR, is concentrated on companies which systematically report negative net results and have liquidity and solvency restrictions, and, therefore, may require State Budget support.

“These bailouts generate perverse moral hazard incentives, as beneficiaries are encouraged to take excessive risks and creditors driven to accept financing unfeasible projects in the expectation of receiving State resources in the future,” the Risk Management Office writes.

Also in the note to which ‘O País’ has had access, the GGR says it has started making assessments and analysis, and issuing credit risk opinions on the companies that make up the State’s business sector, in order to alert the government to the fiscal risk associated with refinancing these companies.

The office’s first phase evaluations were based on Altman’s Z-Score methodology. However, the exclusive consideration of quantitative elements led to the search for alternative methodologies that take into account qualitative elements such as that of Moody’s.

The application of Moody’s in its entirety was limited by the fact that there are specific methodologies for each sector, some incompatible with the Mozambican scenario.

These limitations caused the GGR, through adaptations and combination of credit risk determination factors found relevant in the different sectoral methodologies of Moody’s, to create a single formula for all sectors aligned to the Mozambican context, called “Moody’s Methodology adjusted for ESE credit risk assessment in Mozambique”.

The design of this new methodology required the involvement of the relevant organic units within the normal functioning of the institutional framework for the implementation of credit risk analysis of the state business sector.

However, these analysis, although crucial in themselves, are not decisive for the decision to issue guarantees or other instruments to support the financing of State-owned companies, but rather constitute a starting point for the analysis and evaluation for the approval of the same.

Source: O País