Fitch Downgrades Mozambique Rating to Junk Grade
Fitch Ratings has downgraded Mozambique’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘CCC+’, reflecting the country’s financing strains, domestic debt service risk and wide deficit.
According to the rating note, unresolved political and social unrest have hit the fiscal position at a time of elevated government financing needs and uncertainty over external financing.
The rating note explained that post-election protests have dented government revenues and economic activity and complicate fiscal adjustment. Switch auctions have been used to extend domestic maturities, but large financing needs pose a significant vulnerability, according to Fitch Ratings.
FX reserves have held up, amid FX liquidity pressures, but prospects for external flows are not clear. Tougher domestic financing challenges increase the risks of spillovers to external repayments.
Fitch sees significant risks to domestic debt servicing, reflecting high financing needs and longstanding weaknesses in public finance management.
Domestic debt amortisation payments jump in 2025 owing to the recent increased resort to short-term domestic financing, and constrained access to external financing will keep domestic deficit financing needs large. Delays in the servicing of domestic debt have been common in recent years and re-intensified in 4Q24, partly reflecting revenue shortfalls.
The authorities are using switch auctions to extend domestic maturities, but Fitch thinks that a broader restructuring of domestic debt is possible. However, the concentration of holdings in large domestic banks and the state pension fund means this is not probable.
Domestic banks are liquid (and this will be boosted by a cut in local-currency reserve requirements in January) and have few alternatives to deploy funds. An overdraft facility with the central bank may also provide some room for the sovereign.
Annual coupon payments on Mozambique’s one Eurobond are around USD80 million, with principal payments of around USD250 million per year starting in 2028 ahead of the 2031 maturity.
Fitch estimates that the general government deficit widened to 6.5% of GDP in 2024. Post-election disruption to economic activity caused a shortfall in revenue estimated by the government at 3% of GDP and certain spending was scaled back in response. The change in government has delayed the production of a 2025 budget.
Tackling the large public sector wage bill against a backdrop of social unrest is a key challenge for the new government.
A more stable domestic environment should allow some revenue normalization in 2025, while financing constraints on spending mean, analysts project the deficit to narrow to 4.4%.
Higher deficits mean Fitch now expects general government debt/GDP to fall at a much slower pace that at the time of its last review.
“We still estimate a fall in debt to 93.8% of GDP in 2024, owing to the out-of-court settlement of liabilities related to the loans from the “hidden-debt scandal”, which Fitch includes in its government debt perimeter. Debt/GDP at end-2026 is now projected at 93.4% from 89.9% in August review.
Widespread social unrest triggered by the results of October’s elections has eased, but risks of a renewed flare-up are significant.
Opposition parties rejected results showed the ruling Frelimo party and its presidential candidate won the polls, with protests throughout the remainder of the year. Venancio Mondlane, the figurehead of the protest movement and second in the presidential elections, returned to the country on 9 January, having departing after the elections and retains some support.
Disruption caused by protests hit economic activity in 4Q24, through destruction of property, looting, strikes, supply chain dislocation and the confidence channel. This was exacerbated by cyclone Chido.
Fitch has revised down its estimate of real GDP growth to 2.5% for 2024 (from 4% at the time of its previous review). Elevated uncertainty, tighter fiscal policy and foreign exchange shortages will weigh on growth in 2025, forecasted at 3.2%. Medium-term investment prospects outside the energy sector are likely to have been damaged.
FX reserves are forecast to be broadly stable, at USD3.7 billion at end-2025, although political difficulties bring risks to IMF and other donor funding. Social disruption and the transition of power prevented the IMF from concluding the fifth review of Mozambique’s Extended Credit Facility (ECF) and it is likely that many end-year quantitative performance criteria were missed.
Fitch assumes the new government will remain engaged with the IMF and the programme may be extended, but prolonged social unrest would complicate relations (the ECF expires in May). Mozambique is a relatively large recipient of US foreign assistance.
The current account deficit will widen sharply to 25.3% of GDP in 2025 and 30.5% in 2026 from an estimated 17.5% in 2024, reflecting a significant increase in imports (goods and services) associated with LNG projects, particularly the resumption of the construction of Total’s LNG project.
These imports will be fully financed by investment through the financial account and will have a limited impact on Mozambique’s international reserves.
Prospects for the gas sector remain strong, but risks remain. There has been some unrest in the north, which may have set back the prospects of lifting the force majeure on the massive Total LNG project in place since 2021, while some export credit agencies are reportedly reviewing their financial pledges in light of recent political developments.
Nonetheless, Total remains committed to the project and prospects for US Eximbank financing may improve under the new US administration. Fitch expects the project to resume in 2025.
Monetary policy loosening is likely to continue in order to support the economy, although this will be calibrated against risks of disorderly currency depreciation. The central bank cut the policy rate by 50bp at its January meeting, to 12.25%, continuing an easing cycle that saw cuts of a cumulative 450bp in 2024.
The rate cut was lower than earlier moves (all 75bp), likely reflecting the rise in inflation to 4.2% in December from 2.9% in November as post-election unrest disrupted supply. Local- and foreign-currency reserve requirements were cut by 10pp, which should help with reported FX shortages. #Fitch Downgrades Mozambique Rating to Junk Grade Chinese Firm Expresses Support for $20b Ogidigben Gas Project
