Fitch Keeps Mozambique Ratings at CCC+

Fitch Ratings kept Mozambique’s sovereign credit rating at ‘CCC+’, reflecting elevated government debt levels, weak public financial management, low GDP per capita, weak external finances, weak governance indicators and a challenging security situation.

According to the rating note, the country’s robust medium-term growth prospects supported by the development of the liquefied natural gas (LNG) sector, the agreement of a three-year USD456 million Extended Credit Facility (ECF) with the IMF in 2022 and the concessional nature of public external debt with low service costs provide some support to creditworthiness.

Fitch expects Mozambique’s real GDP growth to remain strong relative to peers, averaging 4.5% over 2024-2025, from an estimated 5.9% in 2023. Strong economic momentum in 2023 was driven by the expanding output from ENI’s Coral South floating LNG project, which began production in 4Q22 and reached 90% of capacity in 3Q23.

“We assume the resumption of the construction of Total Energies’ onshore LNG project (Golfinho Atum) in 1H-2024, which we expect to have a positive effect on the real economy over our forecast period, through the use of domestically supplied goods and services”.

In the rating note, Fitch forecasts the general government debt/GDP ratio to decline to 93.6% at end-2024 and 90.2% in 2025, from 96.4% at end-2023, primarily driven by strong nominal GDP growth of 39% over the period.

“Our general government debt numbers include central government debt, the debt of the national hydrocarbons company (ENH), and loans related to the ‘hidden debt’ scandal”.

It stated that the decline in general government debt partly reflects an off-court agreement between Mozambique and creditors from the Proindicus loan, one of the three state owned enterprises, SOEs, involved in the “hidden debt scandal”.

The government settled the portion of debt claimed by Credit Suisse and several commercial banks, amounting to a combined 82% of the total outstanding (USD987 million in principal and interest), in exchange for a USD143 million cash payment.

This agreement resulted in a net 3.2 percentage point reduction in our debt/GDP estimation for 2023. The government continued to accumulate external and domestic debt arrears through 2H23 and early 2024 due to capacity constraints.

Between June and September 2023, authorities incurred external arrears amounting to a total of USD2.5 million between IFAD, the African Development Bank and BADEA, all of which have been fully settled.

According to the rating note, between 4Q23 and 1Q24, additional arrears were accumulated on bilateral debt service to Spain, India, China, Japan and Portugal (amounting to close to USD20 million).

Fitch understands that delays in the sovereign’s servicing of domestic debt also persist. The government missed coupon and principal payments on domestic bonds in 1H23, with all instances being subsequently resolved. Delays in both coupon and principal payments continued in 2H23, although the duration of the delays has shortened.

The global rating firm estimates Mozambique’s fiscal deficit narrowed to 3.2% of GDP in 2023, from 5.2% in 2022, primarily reflecting the partial correction of the 2022 expenditure slippage resulting from the poor implementation of a new public sector wage scale.

“We estimate the expense on employees’ compensation to have declined by 1.8pp to 15.3% of GDP, reflecting measures such as a hiring limit, a 20% cut in public sector salaries, and the reduction of salaries and subsidies of public office holders.

“We forecast the fiscal deficit to narrow further, to 2.6% in 2024 and 2.0% in 2025, mostly driven by an additional 1.2pp reduction in expense on employees’ compensation over the period, due to the cumulative effect of the hiring limit and strong nominal GDP growth.

“Interest payments will continue to increase due to expensive domestic financing, to 4.2% of GDP over 2024-2025, from 3.8% in 2023 and an average 2.9% during 2020-2022”.

Fitch expects LNG production to only have a meaningful impact on government revenue over the longer term due to the cost-recovery mechanism in contracts with concessionaires.

Mozambique’s satisfactory performance under the IMF’s three-year extended credit facility (ECF) supports the country’s capacity to meet its external commitments.

The IMF completed the third review of the ECF programme in January 2024, with five of eight structural benchmarks and three of four quantitative performance criteria met as of end-2023.

Performance under the programme will support concessional external disbursements, including from the IMF, the World Bank, and the Saudi Development Fund. The broader financing needs will also be met through issuance in the domestic bond market.

Fitch estimates Mozambique’s current account deficit (CAD) narrowed substantially to 10% of GDP in 2023, from 34% in 2022, largely reflecting a decrease in imports associated with megaprojects, following the import of Coral South’s floating LNG platform in 2022.

The CAD will jump to 35% of GDP in 2024 and 38.5% in 2025, due to imports associated with Total’s Area 1 LNG project. The impact of megaprojects on international reserves and Mozambique’s broader external stability is limited, as they are fully financed by financial account inflows (foreign direct investment and trade credits).

“We estimate Mozambique’s international reserves to have increased to USD3.1 billion in 2023 (from USD3.0 billion in 2022) and expect an increase to USD3.5 billion at end-2025.

“The increase in reserves will be driven by lower food and fuel import costs, a marginal contribution from LNG exports, and the resumption of Total’s Area 1 project”, it stated.

Parliamentary and presidential elections are scheduled to take place in October 2024.

Fitch does not expect the outcome of the votes to lead to any meaningful reversal of the reforms implemented since the beginning of the IMF programme in 2022 or to cause any disruption to the development of mega projects in the LNG sector.

The security situation in the northern Cabo Delgado region has improved since the deployment of Rwandan and SADC troops in 2021, but the insurgency remains to be fully suppressed.

“We forecast inflation to average 5.9% and 5.2% in 2024 and 2025 respectively, from an average of 7.2% in 2023”. Fitch expects lower inflation and monetary policy easing to support growth in the non-LNG economy.

In January 2024, the central bank cut its key policy rate by 75bp to 16.5%, following a 400bp increase between January and September 2022 (to 17.5%). We expect an additional reduction by 150bp by the end of the year. #Fitch Keeps Mozambique Ratings at CCC+a#

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