SECOND AGENCY DOWNGRADES MOZAMBIQUE’S RATING

A second credit ratings agency has downgraded Mozambique’s rating, largely because of concerns over the country’s debts, and particularly over repayments of the 850 million US dollar loan to the Mozambique Tuna Company (EMATUM).The Moody’s agency followed Standard and Poor’s which last month downgraded Mozambique’s rating from B to B minus. In the terminology used by Moody’s, this one notch downgrade is from B1 to B2. A statement from Moody’s Investors Service in New York also changed the outlook for Mozambique to negative. Explaining the downgrade, Moody’s said “the key driver reflects the underperformance of Mozambique’s fiscal and debt metrics compared to peers, which is expected to continue over the medium term”. Moody’s forecasts that public debt “will continue to increase and likely reach 60% of GDP in 2015-16 due to large fiscal deficits and a weakening currency against the dollar”. It added that “this constitutes a substantial deterioration compared to its 2011 level, when it stood at 37%, and exceeds the median ratio of B1 rated sovereigns of 48%”.The government, the agency argues, “has run large fiscal deficits resulting from a high volume of government capital expenditures (16.5% of GDP in 2014), fast-growing current spending and decreasing grants from the international community”.Moody's believes that “fiscal deficits will contract in 2015 and 2016, though at a slow pace. This reflects two countervailing forces, which are government efforts to rein in spending and increase the tax intake, and the persistently falling levels of grants”.

 The forecast, based on Finance Ministry statistics, is that “fiscal deficits will decrease to 5.7% of GDP in 2015 and to 5.1% in 2016 from a high of 7.9% in 2014, which was an electoral year characterized by increased expenditures”.The agency believes that any further reduction in the fiscal deficit “albeit possible, is unlikely because of (i) the observed rigidity in current spending and (ii) the limit to which capital spending can be cut without hurting the government's efforts to upgrade the country's infrastructure and enhance growth potential”

The weakening of the Mozambican currency, the metical, against the US dollar “has exacerbated the negative pressure on government debt levels and servicing costs, due to the high share of foreign-currency denominated debt”, the release adds.Nonetheless, Mozambique’s public debt is currently sustainable. “While government debt has risen in recent years, at the end of 2014, 74% of it was composed of bilateral and multilateral loans on favorable terms, translating into high debt affordability”, Moody’s noted.As for the negative outlook, this “reflects the uncertainties surrounding the government's strategy for covering its increasing external, foreign currency denominated debt payments.” Moody's expects such payments to increase in the medium-term largely because of the 850 million dollar loan which EMATUM took on the Eurobond market in 2013. The loan was only possible because the Mozambican government guaranteed it. If EMATUM cannot repay, the burden falls on Mozambican taxpayers. This loan has to repaid in seven years, with just a two year grace period, and at the high interest rate of LIBOR (London Inter-Bank Offered Rate) plus 6.5 per cent. Although the loan repayments have been split into two, with EMATUM taking responsibility for 350 million dollars, and the government for the remaining 500 million, Moody’s doubts that the company will be able to repay any of the loan, so that repayment ”will likely fall, in full, on the government”.Debt servicing, Moody’s adds, “could pressure government liquidity in the medium-term, the extent to which will depend on the government's debt management strategy”. That strategy, the agency claims, has not yet been defined, and it thinks it likely that the government will seek external funding, the impact of which “would depend on whether the financing takes the form of debt, the level of concessionality in the aforementioned debt, and/or if the government receives additional budget support”.The alternative would be to finance the foreign debt domestically, in meticais, which could prove very expensive. “This would still add pressures to the country’s foreign exchange reserves, as this financing would need to be converted into dollars to repay the EMATUM bond”, the release says.

Moody’s warns that Mozambique’s rating could be further downgraded “if the government does not find a medium-term plan to deal with increasing external debt payments. Given the government guarantee, a debt restructuring of the EMATUM bond amounting to a distressed exchange would also lead to a downward rating adjustment”.A “distressed debt” is defined as the debt of companies that have filed for bankruptcy or have a significant chance of filing for bankruptcy in the near future.Recovery in the Mozambican rating seems to depend entirely on the debt question. Moody’s remarks that “a stabilization of the outlook could however result if uncertainties surrounding the government debt management strategy dissipate”.