Fitch
Ratings has downgraded Mozambique’s Long-term foreign and local currency Issuer
Default Ratings (IDRs) to ‘CCC’ from ‘B’.Fitch has also downgraded the Country
Ceiling to ‘B-‘ from ‘B’ and the Short-term IDR to ‘C’ from ‘B’.
KEY
RATING DRIVERS
The
downgrade of Mozambique’s IDRs reflects the following key rating drivers and
their relative weights: HIGH Mozambique’s public debt profile has deteriorated
sharply following the disclosure of additional state-guaranteed debt, which had
previously been excluded from official statistics. The terms of the loans are
yet to be fully disclosed, including the extent to which cross-default clauses
could precipitate a credit event.However, it is certain that their commercial
nature will lead to a worsening of the country’s debt-servicing schedule and
sustainability, which until recently Fitch considered favourable given the
large share of concessional lending.According to the IMF, this debt to opaque
state-owned enterprises amounts to at least USD1bn, around 6.3% of GDP in 2013
(the year it was incurred).We have re-estimated our general government debt
figures accordingly, with the ratio of GGGD/GDP now standing at 83.3% at
end-2015. This
compares with 73.3% stated in our most recent rating action commentary (21
March 2016) and 54.4% for the ‘B’ median. Fitch now estimates that 88% of total
public debt is foreign currency denominated (versus 69.1% for the ‘B’ median),
raising risks to debt sustainability.
Our
expectations of a further weakening of the metical in 2016 are likely to push
public debt/GDP to over 100% in 2016, the highest figure in 15 years and
compared with only 37.8% in 2011.
The lack
of transparency from the government in disclosing the loans highlights
weaknesses in both governance standards and the policy framework and has also
worsened relations with donors, who provide around 9% of GDP in grants and
loans per year. In this context, the outcome of current negotiations with the
IMF, which has put on hold its standby credit facility (SCF) programme agreed
in December 2015, will be crucial to determine the macroeconomic impact of
recent developments.Although a complete halt of IMF assistance is highly
unlikely, the Fund is likely to demand much more stringent public finance
management and fiscal targets to continue making disbursements under the SCF.Given
the country’s very limited financing options, any delays in restoring trust
with donors would risk increasing fiscal, external and exchange rate
instability.
MEDIUM
Recent
figures from the Central Bank of Mozambique point to a worse than expected
weakening of the country’s external position in 2015.The trade balance
deteriorated sharply as exports continued to struggle while imports contracted
by only 5%, highlighting the country’s limited import-substitution capacity.Foreign
direct investment (FDI; traditionally the main source of funding for the
current account deficit) fell by 24% in 2015, as large resource extraction
projects reached completion.Uncertainty over the timeframe of liquid natural
gas (LNG) projects and downside risk to FDI amidst the recent deterioration in
macro-stability could increase pressure on Mozambique’s weak foreign exchange
(FX) reserves position in 2016-17.Fitch now forecasts FX reserves coverage (in
terms of current external payments) at only 2.3 months in 2016, the weakest
level in two decades.Inflation has started to accelerate rapidly, reaching a
five-year high of 13.6% in March. This reflects supply side constraints
(adverse weather has affected food production) and the depreciation of the
metical against the US dollar (13% since December 2015) and the South African
rand (13.5%).Higher prices have forced the Mozambican Central Bank to lift its
main interest rate by 525 basis points since September 2015.
Further
monetary tightening is likely in the short term, hindering growth.
Any
adverse developments from the current problems with creditors could put even
more downward pressure on the metical, resulting in potentially higher
inflation and a more challenging policy scenario.Mozambique’s CCC IDRs also
reflects the following key rating drivers: Medium-term economic prospects
remain positive and are a key rating strength.Although growth is expected to
slow in 2016, in line with fiscal contraction and higher inflation, we expect
it to remain close to 5%, above the ‘B’ median of 4.3%.GDP growth should
accelerate from 2017 onwards, on the back of reduced macroeconomic instability
and a recovery in exports. Key
infrastructure projects, such as the Nakala railway and port terminals have
been completed and could help lift coal exports (as well as FX reserves)
significantly over the next two years, especially if commodity prices recover.However,
important downside risks remain, including extended drought, further adverse
policy developments and the cancellation of LNG projects.
Mozambique’s
banking sector continued to enjoy a strong performance in 2015, despite
mounting macroeconomic challenges.The system’s return on equity averaged 20%,
while capital adequacy stood above 16%. There has been a deterioration in terms
of delinquent loans, but at 4.3% at end-2015, NPLs are still moderate and well
provisioned.Importantly, banks’ FX exposure is less pronounced than in other
countries in the region, with FX lending and deposits comprising 22% and 35% of
their respective portfolios at end-2015. Moreover, most credit in FX is
directed to companies with access to US dollars, reflecting macro-prudential
measures (ie. extra provisioning requirements) that de-incentivise such
lending.The country has some of the weakest structural features of speculative
grade sovereigns.Per capita income stood at USD550 in 2017, only 15% of the ‘B’
median and the lowest figure of all rated sovereigns.Human development
indicators are also well below the ‘B’ median. As highlighted by recent events,
institutional factors such as transparency and data quality are very weak and a
major constraint on the rating.
RATING
SENSITIVITIES
The main
factors that could lead to a downgrade are:
-Confirmation
of an imminent or actual credit event including the non-payment of
sovereign-guaranteed debt obligations or the announcement of a debt
restructuring that we regard as a Distressed Debt Exchange. The following
factors could lead to an upgrade:
–
Evidence of effective resolution of potential default risks from the newly
discovered debt.
–
Normalisation of donor support relationships.
-Fiscal
consolidation that leads to a decline in government debt/GDP.
-A
recovery in commodity prices that reduces external pressures and helps restore
foreign exchange reserve coverage.
-Increased
confidence in the development of natural resource sectors leading to a stronger
external position.
KEY
ASSUMPTIONS
Fitch
assumes Brent oil prices to average USD35/bl in 2016 and USD45/bl by 2017.
Despite
an uptick in violence in northern regions of Mozambique, Fitch assumes that
political stability will be maintained given that the ruling Frelimo party
controls all government institutions.
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