The upgrade of Mozambique’s Long-Term Foreign-Currency IDR reflects the curing of the restricted default following the completed restructuring of its sole Eurobond (MOZAM – USD726.5 million, 10.5%, maturing in 2023), which had been in default since January 2017.
On 30 October 2019, the bondholders exchanged MOZAM for a new USD900 million bond, covering arrears on principal and interest of the previous bond. The terms also include a maturity extension to 2031, a coupon of 5% until 2023 and then of 9% until maturity. In addition to the new bond, Mozambique made an up-front cash payment of almost USD40 million to bondholders.
Mozambique’s ‘CCC’ Long-Term Foreign-Currency IDR reflects continuing unresolved public sector debt liabilities that could affect the sovereign’s credit profile, high levels of gross general government debt (GGGD), tight liquidity conditions, and a track record of weak public finance management.
The status of the two non-performing loans to companies initially set-up as state-owned-enterprises (SOEs), Proindicus S.A. and Mozambique Assets Management (MAM), remains uncertain. These loans were initially disbursed in 2013, purportedly with the benefit of separate state guarantees, but were not reported to the IMF or reflected in the government debt metrics until 2016.
Since 2016, Proindicus and MAM had not made principal or interest payments due under their respective loans, which total USD1.2 billion (8% of GDP in 2018). Mozambique is challenging the validity of the purported guarantee of the Proindicus loan in British courts, while continuing its investigation into the MAM loan and its associated state guarantee.
Given the uncertainty surrounding these obligations and the outcome of ongoing proceedings, it is not clear at this stage whether any future restructuring of these loans would be consistent with a default event under Fitch’s sovereign rating criteria. It was yet to be established whether the purported sovereign guarantees were unequivocal, irrevocable and unconditional.
However, Fitch said in a statement that the country’s debt excluding broader public sector domestic debt, remained high. It is predicted to rise to 101% this year from 97% in 2018. This is a result of the higher principal of the new Eurobond, accumulated external payment arrears and an increasing level of domestic debt.
Fitch projected this debt to decline to 94% of GDP in 2020 and 89% in 2021, The increase in official grant inflow would partially offset borrowing needs. Exchange rate volatility is a key risk to debt sustainability as 85% of GGGD is denominated in foreign currency. The government is currently discussing possible restructuring solutions with some official bilateral creditors. However, such restructuring would be unlikely to constitute a default under Fitch criteria.
The country’s liquidity and financing conditions remain tight. Financing needs, arising from the fiscal deficit (forecast to widen to 6.2% on a cash basis this year) and debt amortisation also remain high at 9% on average over 2019-2021. This was partly owing to high reconstruction needs following the two cyclones that hit Mozambique in April. Foreign exchange reserve levels, which were already low, will decline further in 2019 to 2.3 months of current account payments and 2.1 months in 2021 from 3.5 months in 2018 given Mozambique’s high external financing needs.
Financing options are limited. In response to the cyclones, the IMF provided a Rapid Credit Facility of USD188.2 million, catalysing additional grants worth around 5% of GDP per year over 2019-2021. This would help contain the fiscal and current account deficits. However, the sovereign financing options are narrow given frozen budget support from official donors since 2016, limited access to international capital markets and a shallow domestic market.
The agreement of a medium-term policy conditioned programme with the International Monetary Fund (IMF) would ease financing conditions. Negotiations between the government and the IMF had reportedly made progress following the government’s efforts on the governance and public debt sustainability fronts, but the authorities had not yet formally requested a programme.
The new President was re-elected with 73% of the votes in the October.. In addition, the ruling party, FRELIMO, won the parliamentary elections with 184 seats out of 250 and would govern in all 10 provinces. The main opposition party, Renamo, appealed the election results, accusing the government of fraud and of using violence to intimidate voters during the election campaign. Their complaints were unlikely to be successful in court, even though the United States and the European Union confirmed irregularities. These mounting tensions put at risk the implementation of the peace agreement, which both parties recently signed in a bid to resolve the on-going conflict that led to a civil war (1977-1992) and to violent flare-ups between 2013 and 2018.
Source: Fitch Ratings