Unabridged: Moody’s downgrades Mozambique issuer rating to Caa1

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Unabridged: Moody’s downgrades Mozambique issuer rating to Caa1

2:05 CAT | 17 Apr 2016

Moody’s Investors Service has today downgraded Government of Mozambique’s issuer rating to Caa1 from B3, outlook stable. This concludes the review for downgrade initiated on 17 December 2015 and extended on 15 March 2016 after the announcement of the Mozambique EMATUM Finance 2020 B.V. (EMATUM) notes (WR) exchange offer.

The key driver behind the issuer rating downgrade is the recent debt exchange orchestrated by the Mozambique government on EMATUM notes, which Moody’s considers to be a distressed exchange and therefore a default on government-guaranteed debt. Moody’s views the default as a sign of diminished willingness on the part of the government to honour future debt obligations. This outweighs the positive impact that the debt exchange has on external liquidity via the improvement, in the medium-term, of the government external debt amortisation profile.

Concurrently, Moody’s has assigned a Caa1 rating to the $726.5 milion debt issued in exchange for the EMATUM notes, which constitutes a direct obligation of the Mozambique government. The senior unsecured debt instrument ranks pari passu with the government’s other external debt.

The Caa2 rating on the EMATUM debt has been withdrawn.

Moody’s has also lowered the foreign-currency deposit ceiling by one notch to Caa2 from Caa1, and the foreign-currency bond ceiling by two notches to B3 from B1. Moreover, the local-currency country ceiling has been lowered by one notch to B2 from B1.

RATINGS RATIONALE

Downgrade to Caa1

The key driver behind Moody’s decision to downgrade the issuer rating of the Government of Mozambique is the overall negative implications that the EMATUM notes exchange has on Moody’s assessment of the government’s creditworthiness. Moody’s considers this debt exchange, which was concluded on 6 April 2016, to be a distressed exchange and therefore a default on the part of the Government of Mozambique on its guarantee to EMATUM notes-holders.

The debt exchange leads to a variety of countervailing credit developments. On the one hand, the exchange has a positive net impact on the balance of payments and on government financing requirements over the medium-term. As well as implying a diminished obligation relative to the original promise, the exchange has allowed the government to defer a range of payment obligations over the coming years to the maturity of the bonds in 2023. In doing so, the exchange has helped to alleviate pressures that Mozambique experiences on its external position. Those pressures led to the need for IMF intervention in December 2015, via a $285 million short-term credit facility, and caused Mozambique’s foreign exchange reserves to decline to $2.2 billion in January 2016 from $3.2 billion in mid-2014.

Moody’s estimates that the overall positive impact of the debt exchange on foreign exchange reserves and government financing requirements will amount to 1.5% to 2.0% of GDP over 2016-2018, on a cumulative basis. The extent to which this debt exchange will have a positive net impact on the balance of payments and the government finances is contingent upon an early repayment right that exists on government bank loans, which may be exercised as part of a clause giving lenders prepayment right in cases of credit rating downgrade (contributing to a small 0.1% of GDP in 2016).

On the other hand, Moody’s generally views distressed debt exchanges as indicating a diminished willingness on the part of the government to service future debt obligations relative to the original promise. While Moody’s recognises that the effect of the debt exchange has been to reduce the external financing pressures facing the government over the near term, the underlying drivers of those pressures — low commodity prices and fast growing imports related to general consumption — are likely to persist in the coming years. Moody’s expects the pace of depletion of the country’s foreign exchange reserves to diminish, but the reserves level is likely to continue to fall. As pressures persist over the rating horizon, the government’s willingness to orchestrate a default to cope with those pressures now assumes a greater significance and as such supports the rating downgrade to Caa1.

Stable outlook

The outlook is stable as upside risks and downside are balanced. In particular, the Caa1 rating already incorporates Moody’s expectation that external pressures will continue to weigh on the level of foreign exchange reserves in 2016 and 2017.

What could change the rating up

Moody’s would consider upgrading the rating if external imbalances were to diminish, lowering the risk that pressures persist over the rating horizon and therefore the significance of the recent distressed exchange. In particular, a sustained stabilisation and replenishment of foreign exchange reserves could lead to an upgrade. A track record of government debt service payment would also put upward pressure on the rating over the longer-term.

What could change the rating down

Moody’s would consider downgrading the rating if a default by the government on its debt payments were to appear imminent, with the loss likely to exceed 10%.

GDP per capita (PPP basis, US$): 1,178 (2014 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): 5% (2015 Actual)

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

Current Account Balance/GDP: -37.2% (2015 Actual) (also known as External Balance)

External debt/GDP: 92.8% (2015 estimate)

Level of economic development: Very Low level of economic resilience

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

On 12 April 2016, a rating committee was called to discuss the rating of the Government of Mozambique. The main points raised during the discussion were: The recent Debt Exchange and the negative implications this had on the government creditworthiness.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015.

15 Apr 2016

Source: www.moodys.com