African markets

Fitch confirms Mozambique to the “CCC”

Fitch Ratings confirmed Mozambique’s Long-Term Foreign Currency Issuers (IDR) default rating at ‘CCC’.

Fitch generally does not assign Outlook or apply modifiers for sovereigns with a rating of “CCC” or less.

A full list of rating actions can be found at the end of this rating action commentary.

Main rating factors

Substantial credit risk: Mozambique’s “CCC” rating reflects high levels of public debt, limited sources of financing combined with high fiscal and external financing needs, still unresolved public sector debts, low GDP per capita, weak governance indicators, a difficult security situation and vulnerability to natural disasters. The potential for a significant acceleration in economic growth over the next few years, driven by the LNG sector, is promising for public finances and solvency.

Stronger growth ahead, but risks remain: Mozambique’s economy grew a modest 2.2% in 2021, after contracting 1.3% in 2020, but Fitch expects an acceleration in 4.5% in 2022 and 8% in 2023. Restrictions in January and the resumption of construction of Total’s $20 billion (122% of GDP) LNG project will boost domestic demand. The likely start of production at ENI’s Coral Sul LNG project in 4Q22 will be an additional growth driver. The economic outlook remains sensitive to the unfavorable evolution of the security situation in Cabo Delgado (where the LNG megaprojects are located) and to the evolution of the pandemic in Mozambique. Only 39% of the population was fully vaccinated at the end of February 2022.

Improved security situation: Security risks have subsided since our last review, largely due to the deployment of Rwandan and Southern African Development Community (SADC) military forces to Cabo Delgado in June 2021. Islamist insurgents were pushed into remote areas and their main bases dismantled. Nevertheless, significant security risks remain, which could negatively affect LNG projects.

LNG projects will face delays: Total is expected to resume construction of its LNG project in 2022, but production is now only expected to start in 2026, two years later than expected in our previous review. According to official projections, gas projects are expected to boost GDP growth by an additional 2 points in 2024, but this is expected to be significantly revised downwards due to this postponement. We await ExxonMobil’s final investment decision on its $30 billion project in 2022.

The budget deficit should remain moderate: Fitch expects the budget deficit (including grants) to decline slightly to 3.0% of GDP in 2022 and 2.8% in 2023, from around 3.2% of GDP in 2020, reflecting an increase in subsidy payments and an increase in taxes. revenue to GDP as collection from ENI’s offshore LNG project is expected to begin in 4Q22. The expenditure profile is rigid, with salaries and interest estimated at 53% of total expenditure in 2021. The coupon rate on Mozambique’s $900 million Eurobond in 2031 will increase from the current 5% to 9% in 2024. The under-execution of expenditure, particularly in terms of capital expenditure, could alleviate budgetary financing needs.

Financing constraints are set to persist: Fitch estimates Mozambique’s gross fiscal financing needs at 7.1% of GDP in 2022, including net lending to public enterprises (EP; 0.3% of GDP) and amortizations (4 .1% of GDP). We expect Mozambique to meet these financing needs through a combination of external public financing, domestic issuance and government deposits. Funding sources remain limited. There are signs of growing saturation in the domestic government bond market, following the increase in domestic government borrowing in recent years. While we expect domestic debt to be rolled over given ample liquidity in the banking sector, net funding increases may become more difficult due to internal bank limits. The authorities are currently negotiating an extended multi-year credit facility with the IMF which eases the country’s financing conditions and serves as a political anchor.

Public debt will remain high: the ratio of public debt to GDP fell to 112.4% at the end of 2021, largely reflecting the impact of the 15% appreciation of the metical (80% of the debt is denominated in foreign currencies foreign) as well as strong nominal GDP growth. Our public debt figure includes currently overdue guaranteed loans to two former state-owned enterprises, worth 10% of GDP at the end of 2021. Although the government has challenged the validity of the two state-owned enterprise guarantees through legal disputes in the English courts, the risk remains that they crystallize as a responsibility of the central government, depending on the outcome of the legal proceedings. Fitch projects debt to decline to 104.5% and 97.6% of GDP in 2022 and 2023, respectively, amid accelerating GDP growth and a modest exchange rate depreciation.

The common framework remains a possibility: Mozambique has not made a decision regarding its participation in the G20/Paris Club common framework to seek debt relief from official creditors, which we consider a separate possibility. Comparable treatment by private creditors would likely be a condition of an agreement. This could affect Mozambique’s only 2031 Eurobond. Fitch would likely view a restructuring of debt to private sector creditors as a distressed debt swap and therefore a default.

Rising current account deficit: Fitch forecasts the current account deficit to widen from around 24.4% of GDP in 2021 to 36.5% of GDP in 2022, largely reflecting an increase in imports related to LNG megaprojects . International reserves fell to $3.7 billion at the end of 2021, as the central bank cut the banking sector’s foreign exchange requirement ratio from 34.5% to 11.5%. We project international reserves to fall to $2.9 billion in 2022, but then increase to $3.3 billion in 2023. Mozambique is vulnerable to extreme weather events.

Accelerating inflation: Fitch expects the central bank to raise its policy rate by 125 basis points in 2022 to address rising inflationary pressures. The central bank significantly tightened its policy in early 2021 by raising its key rate by 300 basis points to 13.25% to address rising inflationary risks stemming in part from the sharp depreciation of the metical in 2020. While the metical has strengthened since, inflation reached 7.8% in January 2022. , and we expect an annual average of 8.5% due to higher oil and food prices.

ESG – Governance: Mozambique has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights and for Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary sovereign rating model. Mozambique has a low WBGI ranking at 22.3, reflecting the lack of a recent record of peaceful political transitions, violence associated with insurgency, relatively weak rights for participation in the political process, weak institutional capacity, uneven application of the rule of law and a high level of corruption.