The Fitch rating agency on Saturday downgraded Mozambique’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘CCC’ from ‘B’.
Fitch also downgraded the Country Ceiling to ‘B-‘ from ‘B’ and the Short-term IDR to ‘C’ from ‘B’.
The agency blamed the downgrade on Mozambique’s public debt crisis. The size of the debt proved much higher than imagined when previously undisclosed government-guaranteed loans to the state companies Proindicus and Mozambique Asset Management (MAM), for 622 million and 535 million US dollars respectively, came to light in April.
Angered by the government’s faIMilure to disclose these debts, the International Monetary Fund (IMF) cancelled a mission that was to have visited Mozambique in mid-April, and suspended the second instalment of a 282 million dollar loan from the IMF’s Standby Credit Facility (SCF). Subsequently, two major contributors to the Mozambican budget, the World Bank and the British government suspended financial aid to the country.
The Proindicus and MAM loans, plus the known 850 million government guaranteed bond issue by the Mozambique Tuna Company (EMATUM), were all contracted in 2013-2014 under the previous government led by President Armando Guebuza. Between them they added slightly more than two billion dollars to the public debt. As of the end of 2015, EMATUM, Proindicus and MAM accounted for more than 20 per cent of Mozambique’s foreign debt.
A release from Fitch said it was certain that the commercial nature of these loans “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”.
The agency recalculated the ratio of Mozambique government debt to the country’s Gross Domestic Product, and found that it was 83.3 per cent at the end of 2015. The median of this ratio for countries which Fitch classifies as “B” is 54.4 per cent. Furthermore, 88 per cent of the Mozambican public debt is denominated in foreign currency, compared to 69.1 per cent for the “B” median.
Fitch also expects the Mozambican currency, the metical, to depreciate further in 2016, which is likely to push the debt to GDP ratio to over 100 per cent, “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”, Fitch added. ” In this context, the outcome of current negotiations with the IMF will be crucial to determine the macroeconomic impact of recent developments”.
Fitch predicted that the IMF will not cut all ties with Mozambique, but “is likely to demand much more stringent public finance management and fiscal targets to continue making disbursements under the Standby Credit Facility”.
The agency warned that “Given the country’s very limited financing options, any delays in restoring trust with donors would risk increasing fiscal, external and exchange rate instability”.
Fitch noted that, even before the undisclosed loans came to light, the Mozambican economy faced serious difficulties, with a deteriorating balance of trade, and a sharp fall in foreign direct investment. The agency calculated that Mozambique’s foreign currency reserves now cover only 2.3 months of imports, which is the lowest level for two decades.
Nonetheless, Fitch believed that “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%”.
Looking to the future, it expected the GDP growth rate to speed up as from 2017, “on the back of reduced macroeconomic instability and a recovery in exports”.
Fitch warned that it could downgrade Mozambique still further if there was any default on government guaranteed debt, or any debt restructuring that could be regarded as tantamount to default.
On the other hand, Mozambique could be upgraded, if there was “evidence of effective resolution of potential default risks from the newly discovered debt”, or “normalisation of donor support relationships”,
Other helpful factors would be “fiscal consolidation” leading to a decline in the debt to GDP ratio, and any recovery in the world market prices of key Mozambican exports.
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