High Debt to GDP Ratio Damaged Mozambique’s Credit Profile
The government credit profile of Mozambique has remained adversely affected by the country’s 95% debt to GDP (debt to GDP ratio) as of the 2023 fiscal year.
In its latest commentary note, Moody’s Ratings said it has completed a periodic review of the ratings of Mozambique and other ratings that are associated with this issuer.Mozambique has made progress in strengthening its governance and monetary policy framework, according to Moody’s, but its ratings, including its Caa2 long-term issuer rating, reflect very low fiscal strength given the high debt burden and weaknesses in institutional capacity.
While the ongoing IMF programme drives the reform momentum in these areas, and provides a fiscal policy anchor, it will take time for the reform efforts to enhance overall policy effectiveness.
According to Moody’s, the country’s elevated liquidity and external vulnerability risks also weigh on the credit profile. Real gross domestic product (GDP) grew by an estimated 5% in 2023, up from 4.4% in 2022, mainly driven by the strong dynamics of the extractive industries sector, in particular LNG production.
Macroeconomic stability has been preserved despite Mozambique being hit by multiple shocks, including repeated natural disasters, security-related challenges in the North, and spillovers from the Russia-Ukraine war.
Moody’s projects that real GDP will continue to expand by around 5% in both 2024 and 2025, driven by the good performance of agriculture, construction, and the extractive industry.
Mozambique’s growth trajectory will also depend on TotalEnergies SE’s resumption of the second-most advanced project that was halted in 2021 after declaring force majeure, which is expected to start in the next few months given indications that the security situation in the north has improved.
Analysts expect the International Monetary Fund’s (IMF) ongoing programme to drive gradual institutional improvements, albeit from weak levels, and anchor fiscal policy.
With the recent approval of the law establishing a sovereign wealth fund by the Parliament, the IMF program is also contributing to the establishment of a fiscal framework to better manage the nation’s LNG windfalls.
However, pressures from a concentrated domestic debt maturity profile and the high level of debt (estimated to be approximately 95% of GDP in 2023) continue to raise fiscal and liquidity vulnerabilities.
Mozambique’s economic strength, rated as “b1,” strikes a balance between its considerable potential for LNG development and its low levels of economic diversification, competitiveness, and wealth, as well as its high susceptibility to environmental risks.
The country’s “ca” institutions and governance strength reflect the country’s very weak ranking in the Worldwide Governance Indicators and track record of default. Fiscal strength is scored “ca” due to elevated public sector debt as well as foreign exchange risk exposure.
Mozambique’s susceptibility to event risk is driven by government liquidity risk and external vulnerability due to persistent constraints on access to external funding.
Moody’s stated that the stable outlook reflects its expectation that Mozambique will continue to face fiscal pressures and liquidity challenges amid institutional capacity constraints over the near to medium term.
These could potentially lead to additional delays in debt repayments, as it will take time for ongoing reform efforts to strengthen the country’s debt and cash management capacity.
Simultaneously, the credit profile is reinforced by the potential for fiscal and economic benefits from a developing LNG industry as well as advancements in institutional reforms through the IMF program.
“An upgrade of the rating would be contingent on easing liquidity constraints and strengthening cash-management capacity, as evidenced by a track record of timely debt repayments.”. Moody’s said.
Additionally, it stated that a material improvement in the government balance sheet, indicating ongoing fiscal consolidation and a decrease in contingent liability risks, would put upward pressure on the rating.
“While LNG developments have so far been positive, it will take time to have material implications on the fiscal position and, in particular, on the debt trajectory. A reduction of external vulnerability risk due to an increase in foreign exchange reserves would also be credit-positive.
“We would consider downgrading Mozambique’s ratings if the government misses a coupon payment or indicates intentions to restructure further its private sector debt, including its outstanding eurobond, with investors’ losses likely above 20%,” Moody’s said in its review. #High Debt to GDP Ratio Damaged Mozambique’s Credit Profile
