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Cabo Delgado

Fitch Affirms Mozambique at ‘CCC’

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Fitch Ratings has affirmed Mozambique’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘CCC’.

Mozambique’s ‘CCC’ rating reflects risks to debt sustainability from elevated debt levels, limited sources of financing combined with high fiscal and external financing needs, and still unresolved public-sector debt liabilities.

The ongoing impact of the pandemic and security risks increase near-term expenditure pressures and, in the context of relatively limited sources of financing, could negatively impact medium-term growth prospects and increase challenges to debt sustainability.

Mozambique has not made a final decision regarding its participation in the G-20/Paris Club Common Framework to seek debt relief from official creditors, which we view as a distinct possibility.

Comparable treatment by private creditors would likely be a condition for a deal. This could also affect Mozambique’s sole 2031 Eurobond.

After contracting by 1.2% in 2020, Fitch expects Mozambique to expand modestly by 1.8% in 2021 due to the ongoing impact of the pandemic (with the country experiencing a sharp increase in cases) on the services sector (46% of GDP), limited room for monetary and fiscal policy stimulus due to increased inflationary pressures in 1H21, and financing constraints.

Fitch expects growth to recover to 3.4% and 4.0% in 2022-2023, thus approaching pre-crisis trend levels.

Economic prospects are sensitive to adverse climate events and the evolution of the pandemic in Mozambique and key export markets.

The vaccination campaign has faced delays (1% of the population vaccinated at early July) due to global supply constraints.

Total suspended its liquid natural gas (LNG) project in April, while ExxonMobil had already postponed its final investment decision on its USD30 billion project.

The off-shore ENI project is on track to begin operations in 2022. According to official projections, gas projects were expected to boost growth by an additional 1.1pp in 2023 and over 2pp in 2024, but this positive impact is likely to be postponed by at least one year.

Political risks have increased. The intensification of the conflict with the Islamist insurgency in the gas-rich northern province of Cabo Delgado has escalated since the beginning of the year, leading to population displacements and the suspension of operations by Total.

In addition to training support from the US and EU, the government has recently agreed to receive military assistance from neighboring countries to re-establish control in the area.

The conflict could weaken domestic confidence, exacerbate pressures on public finances and further increase risks to debt sustainability.

Fitch forecasts the fiscal deficit (including grants) to widen to 5.2% of GDP in 2021, up from 3.3% of GDP in 2020, reflecting lower-than-budgeted growth and likely additional spending requirements related to the ongoing third-wave of the pandemic and security and social demands.

Fitch expects a gradual fiscal consolidation with the deficit reaching 3.2% in 2023. The expenditure profile is rigid, with wages and interests estimated to equal 54% of total spending in 2021.

The coupon rate on Mozambique’s 2031 USD900 million Eurobond will increase to 9% in 2024 from 5% currently.

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

Expenditure under-execution, most notably in terms of capital spending, could ease fiscal financing requirements.

Financing options remain limited. Apart from the IMF through its Rapid Credit Facility (USD310 million) in 2020, official creditors have not resumed direct budget support loans, halted since the ‘public hidden debt’ scandal in 2016, although they have provided grants to the country.

The government is reportedly interested in agreeing on a multi-year program with the IMF. Nevertheless, the timeline for negotiations remains uncertain. A program could help ease financing conditions and serve as policy anchor.

Fitch expects Mozambique to meet its 9.5% of GDP 2021 fiscal financing needs (deficit plus debt amortizations) through a combination of external official financing, domestic market issuance (given weak credit demand and available liquidity), use government deposits from late-2020 external loans and participation in the G-20’s Debt Service Suspension Initiative (DSSI).

The DSSI has led to saving USD22 million (0.2% of GDP in 2020) and USD50 million (0.4% of GDP) in 1H21, with an additional 0.4%, if extended until end-2021.

Government debt rose to 121% of GDP reflecting largely the impact of the 18% metical depreciation (83% of debt is foreign currency denominated).

Our debt metrics include arrears, including the loans to two former state-owned enterprises, of an estimated USD1.4 billion (10% of GDP) at end-2020.

Although the government has challenged the validity of both SOE guarantees through legal disputes in the English courts, the risk remain that they may crystalize as a liability for the central government depending on the outcome of the legal proceedings.

Fitch forecasts debt to remain broadly stable at 119% of GDP in 2023 reflecting gradual fiscal consolidation and economic recovery, moderate exchange rate depreciation and borrowing from ENH to finance Mozambique’s equity participation in gas projects.

External buffers remain adequate. International reserves were USD3.9 billion as of May, Reserve coverage should average 4.4 months of CXP in 2021-2022, down from a high 5.3 months at the end-2020, reflecting the USD302 million SDR allocation but also recovering import demand and the government’s use of foreign currency deposits.

Fitch expects the current account deficit to average 35% of GDP in 2021-2022. As megaproject imports intensify leading to a widening of the external deficit, FDI and private sector borrowing related to the projects will be the main sources of external financing.

The central bank tightened policy significantly by increasing its policy rate by 300bps to 13.25% in early 2021 to address rising inflationary risks partly derived from the sharp depreciation of the metical in 2020. Fitch forecasts inflation to reach 5.9% at end-2021.

Nevertheless, the metical appreciated significantly in 1H21, which combined with weaker domestic demand could mitigate inflationary pressures.

ESG – Governance: Mozambique has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the 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 22th percentile, reflecting a track record of civil conflict, 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.

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Cabo Delgado

Rwanda Army Chief Of Staff Visists Mozambique

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Rwanda Defence Force Army Chief of Staff (ACOS), Lt Gen Mubarakh Muganga is on a 4-day visit to Rwandan Forces deployed in Cabo Delgado, Mozambique.

Upon arrival at Mocimboa da Praia yesterday, the ACOS was welcomed by the Joint Force Commander, Maj Gen Innocent Kabandana who briefed him about the progress of military operations against terror groups in Cabo Delgado.

Lt Gen Muganga met Rwandan troops and commended them for the good work done since their arrival in Mozambique.

He further conveyed a message of appreciation from the RDF Commander-in-Chief, President Paul Kagame, for the security achievements gained since the Force’s arrival in Cabo Delgado.

The ACOS urged the Forces to keep the momentum and continue to be good ambassadors of Rwanda.

Rwandan troops in collaboration with Mozambican Forces fought and dislodged the terror groups from several towns including their main bases in MOCIMBOA DA PRAIA and other localities that include among others AWASSE, PALMA, QUIONGA, CHINDA, MBAU, MAPALANGANHA, TETE, NJAMA, QUELIMANE and most recently SIRI I and SIRI II considered to be their strongholds.

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Cabo Delgado

Know Why Young Mozambicans Join Terrorism Groups

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Young Mozambicans have for the past decades lacked means of survival and thus ended up recruited into terrorist organisations, General António Hama Thay revealed on Thursday.

Gen. António Hama Thay is an official in the Mozambican military (currently in the reserve). He has held various positions in the Mozambican government, including chief of the air force.

The General explained this Thursday, in Maputo, that the absence of alternatives for survival, coupled with the fact that the different groups that were resettled in the northern region of Cabo Delgado could be treated differently is a factor that determined the involvement of young Mozambicans in the group of extremists, who cause terror in that part of the country.

He noted that since, after the resettlement process, some groups that lived off fishing were in places where they could not carry out activities that they were acustomed to.

According to Hama Thay, the investing companies were not able to create a framework for the integration of local youth in the projects, limiting themselves only to bringing in labour from other regions of the country, even recruiting for professions considered elementary such as carpentry, electricity , plumbing and cooking.

Hama Thay was speaking at a lecture on the theme “Terrorism: Conceptual Analysis and its Historicity”, at the launching ceremony of the cycle of lectures on terrorism as a global phenomenon carried out by the UEM.

As a solution, the general considers it essential to create additional programs aimed at young people in Cabo Delgado, highlighting the affected districts and considering mining as an integral part and providing the marketing of minerals at competitive prices, as well as evaluating the possibility of creating more mines with the participation of young people.

Furthermore, young people should be prioritized in economic activity based on youth entrepreneurship. For this, the General says that it will be necessary to invest massively in training aimed at young people in projects that meet the expectations of young people.

“In view of what can be extracted as knowledge about terrorism, it is time for Higher Education Institutions to create a chair on this subject,” he stressed.

The cycle of lectures now launched aims to help understand the phenomenon of terrorism in general, and of our country in particular, with a view to providing subsidies that help to better understand this phenomenon, thus contributing to the national debate on terrorism, with a view to creating a more structured knowledge on the subject.

António Hama Thay holds a Doctorate and Post-Doctorate in Business Management and Administration from the Commonwealth Open University. Since 2013, he has been a professor at the Faculty of Economics at UEM.

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Cabo Delgado

Rwanda’s Dominant War Communication ‘Worries’ Mozambicans

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Rwanda’s surgical media machinery has dwarfed other media and government communictions of SADC member states in reporting about the ongoing war operations against terrorists in Cabo Delgado.

According to details on ground, Mozambicans are heavily relying on Rwandan press to get prompt updates on war in Cabo Delgado.

Analysts say lack of communication is a very worrying issue in Mozambique.

“The Mozambican Ministries of Interior and National Defense must quickly reflect on how Mozambique and the international community should know what is happening in Cabo Delgado, so that it is not just Rwandans who are talking about the fight against terrorism in that province,” argue analysts.

At the moment, what is known about the situation in the northern operational theatre is through the Rwandan press, and very little is heard from Mozambique, and for journalist Fernando Lima, this is due to the fact that “there is a very rusty communication system on the Mozambican side.”

Lima added that this is being reflected now, in Mozambique “in a situation where it has to be confronted with another communicational machine that works, completely, in different parameters”.

One-sided narrative

That analyst argued that the Ministries of Interior and National Defense “have to reflect on how they want Mozambicans and the international community to know what is happening in Cabo Delgado, otherwise, “we will only have a unilateral narrative by Rwanda with Mozambique in the wake of Rwandan communication.”

“The lack of communication is a very worrying issue in Mozambique; there has to be a deep reflection on this”, considers, in turn, the analyst Moisés Mabunda, recalling that the recent disagreement between Maputo and Pretoria over the participation of Rwanda in the conflict military in Cabo Delgado was due to lack of information.

Mabunda stressed that, due to a lack of information on the Mozambican side, one gets the impression that the Rwandans are alone in the front line.

However, Mozambican Defense Minister Jaime Neto recently said that Mozambicans are also on the front line.

“The forces of Rwanda and our forces have already engaged in combat several times, and we think the work they are doing is very good,” he said.

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