Mozambique hampered by low liquidity

Mozambique’s long-term foreign-currency issuer default rating has been kept at CCC by Fitch Ratings, as the country struggles with liquidity pressures.

Mozambique has not been given an outlook, as Fitch does not assign outlooks for countries with a rating of CCC or below.

The rating reflects Mozambique’s limited financing options, combined with high external financing needs. This has been exacerbated by the coronavirus disease 2020 (COVID-19) shock, high general government (GG) debt and on-going unresolved public-sector debt liabilities.

Persisting financing constraints affecting the government and the private sector, as well as disruptions from mounting security tensions across the country will weigh on economic activity.

Fitch expects real gross domestic product (GDP) to contract by 1% in 2020, after muted growth in 2019 of 2.2% due to the damage caused by two cyclones.

The rating agency expects the moderate growth in the agricultural sector to partially offset weak performance in the extractive sector, affected by lower prices and demand for Mozambique’s mining exports.

Fitch expects a gradual economic recovery in 2021, with growth picking up to 2.8% and 3.3% in 2022.

The rating agency forecasts the fiscal deficit on a cash basis to widen to 7.2% of GDP in 2020, from 0.5% in 2019. The 2019 revenues were boosted by a one-off 6% of GDP capital gains tax payment due to a large gas transaction.

Increased grant flows of 4.1% of GDP in 2020 will partially offset the hit to tax revenues and higher spending pressures stemming from COVID-19 shocks, reconstruction needs and security concerns.

Fiscal consolidation will be gradual after the COVID-19 shock subsides, with the deficit on a cash basis narrowing only slightly to 6.5% of GDP in 2021 and 6.3% in 2022.

Cuts to current and capital expenditure will offset mounting spending pressures stemming from security concerns and reconstruction needs.

In addition, we expect tax collections to return to pre-pandemic levels only gradually, while grant flows are set to decrease over the projection period.

The wider fiscal deficit in 2020 has aggravated an already tight financing picture. Apart from the International Monetary Fund (IMF), official creditors have not resumed direct budget support loans, halted since the revelations of previously undisclosed public debt in 2016.

Fitch expects Mozambique to meet its financing needs or 11.4% of GDP with official loans, IMF’s emergency funding, domestic issuances and participation in the Debt Service Suspension Initiative (DSSI).

Mozambique’s authorities are still finalising agreements related to the DSSI and the total amount remains unclear.

Fitch expects funding challenges to persist in 2021, while commitments from official creditors to expand forms of direct budget funding remain uncertain.

Mozambique’s authorities have expressed interest in beginning discussions with the IMF on a new medium-term programme, which could help ease financing conditions. However, little progress has been made thus far.

The government is likely to face difficulty in accessing international capital markets and the domestic financing market is shallow.

The status of two loans with purported state-guarantees to ex-state-owned business services firms, Prodindicus and Mozambique Asset Management (MAM) remain uncertain. These companies have now been dissolved under local law.

Prodindicus and MAM have loans with outstanding amount of $1 billion, totalling around 13% of GDP in 2019.

Mozambique has challenged the validity of both guarantees through legal disputes in the English courts.

Fitch expects GG debt to rise to 120% of GDP in 2020, from 94% of GDP in 2019, due to high financing needs and then decline to 115% in 2022.

The debt estimates include the liabilities of Proindicus and MAM, given the possibility they may crystallise on the sovereigns’ balance sheet depending on the outcome of the legal proceedings.

Mozambique is discussing possible debt restructuring beyond the DSSI with some official bilateral creditors. Fitch understands that the authorities do not intend to include market debt in the sovereign’s debt restructuring and relief negotiations.

The coming on stream of large Liquefied natural gas (LNG) projects currently planned for 2023, with total investment of around 415% of 2020 GDP, is likely to be delayed.

This is on the back of postponement of Exxon Mobil’s final investment decision of $30 billion or 215% of GDP previously expected in 2020 and disruptions to global supply chains.

Fitch expects the projects to eventually have significant positive effects on Mozambique’s medium-term growth, although fiscal benefits will accrue well after production commences.

The rating agency forecasts the current account deficit (CAD) to deteriorate to 33% of GDP in 2020 from 20% in 2019, due to depressed coal exports and higher megaproject-related imports.

Fitch expects CAD to widen to 49% in 2021 and 65% in 2022 as the megaproject imports intensify.

The depreciation of the metical by 17% against the US dollar since the beginning of year has absorbed most of the external shock.

The currency flexibility has protected international reserves, which have held up, at $3.9 billion as of September 2020 compared with $3.8 billion in 2019.

Fitch would consider upgrading Mozambique’s rating if there is a substantial decline in the public debt to GDP ratio and easing of financing constrains.

The rating agency would consider lowering the rating if there is increased likelihood of a probable default event or restructuring of sovereign market debt.

This comes after S&P affirmed Mozambique’s foreign currency long- and short-term sovereign credit ratings at CCC+/C, as the economic growth continued to struggle on the back of the COVID-19 crisis.

See full rationale here