Moody’s Downgrades Mozambique’s Local Currency Rating
Moody’s Ratings downgraded the Government of Mozambique’s local-currency long-term issuer rating to Caa3 from Caa2, and affirmed the foreign-currency long-term issuer rating and the senior unsecured debt rating at Caa2. The outlook remains stable.
The downgrade of the local-currency long-term issuer rating reflects the government’s severe liquidity challenges, Moody’s said in a rating note, added that these challenges are primarily due to difficulties in refinancing debt and fiscal pressures, which were further aggravated by the political and social unrest following the early October general elections.
“These challenges have led to default events, including delays in domestic bond repayments and to the start of domestic debt swap auctions aimed at managing the maturity profile, which we see as distressed exchanges”, the rating agency said.
Analysts noted that the likelihood of a broader liability management exercise on domestic debt imposing further losses on private-sector creditors beyond the announced debt swap auctions has also increased.
Meanwhile, the rating note explained that the affirmation of the foreign currency ratings is based on the expectation that authorities will prioritize the Eurobond repayments despite liquidity challenges.
Foreign currency debt service costs are manageable until the Eurobond matures between 2028 and 2031, providing Mozambique’s authorities with time to develop a repayment strategy.
Moody’s said the re-start of the LNG project or further engagement with the International Monetary Fund (IMF) would particularly support the government capacity to service its foreign currency debt.
“The stable outlook reflects our expectation that Mozambique will continue to face liquidity challenges and fiscal pressure amid institutional capacity constraints in the near to medium term.
“These risks are balanced at this rating level against upside risks from potential economic and fiscal gains from the developing LNG sector and stronger than expected progress in governance and fiscal management reforms, assuming the continuation of the IMF program”.
Mozambique’s local and foreign-currency ceilings were lowered to Caa1 and Caa2 from B3 and Caa1, respectively. The two-notch gap between the local-currency ceiling and the local currency sovereign rating reflects weak policy unpredictability, high political risk, the economy’s reliance on commodity revenue balanced by limited government footprint in the economy.
The one-notch gap between the foreign currency and local currency ceiling reflects elevated external imbalances, a relatively closed capital account, and constrained policy effectiveness. Mozambique recently introduced debt swap auctions ahead of the largest upcoming bond repayments in 2025 to smooth the domestic debt maturity profile.
On 11 March, the government exchanged a four-year treasury bond maturing that month with five-year bonds at a 14.25% fixed interest rate.
Although these exchanges are proposed on a voluntary basis by the authorities and part of their strategy to smooth the debt maturity profile, analysts consider them distressed, and so, equivalent to a default under Moody’s definition.
Moody’s said this assessment is based on the issuer’s already weak creditworthiness, the financial loss for investors relative to the original terms, and the aim to alleviate liquidity pressures from large upcoming maturities.
Furthermore, as most distressed exchanges are voluntary, the presence of coercion is not a precondition for a transaction to be deemed a distressed exchange. Liquidity pressures for Mozambique have been elevated in the past two years and increased further due to the combined effect of debt refinancing needs and the economic and fiscal impact of the social unrest following the early October general elections.
“While we expect growth to gradually rebound, we estimate the government’s funding requirements at around 15-16% of GDP in 2025 and 2026, with funding options remaining highly constrained”.
The rating agency stated that liability management exercises on domestic debt, such as the recently announced debt swap auctions, will likely continue as a mean to manage refinancing needs, potentially imposing larger losses on private-sector creditors.
Because the government has increasingly relied on relatively short-term domestic debt in the last several years, the roll-over of this debt has increased, causing refinancing difficulties, the rating note said.
At the same time, the domestic market remains shallow, and the banking sector is already largely exposed to the government, with claims on the government exceeding 20% of total assets as of November 2024.
For Mozambique, external funding options are also constrained. Furthermore, post-election unrest significantly affected growth in 2024, bringing real GDP growth to 1.9% from 5.4% in 2023 with lasting impact on prospects for 2025, causing government’s revenue shortfall and spending pressure in the last quarter of 2024.
“We estimate the fiscal deficit to have reached about 5.7% in 2024 from 4.1% in 2023”. Mining sector, tourism, and trade underperformed in 2024 due to the infrastructure and transport disruptions and the temporary closure of land borders.
The country’s gross domestic product contracted by 4.9% in the last quarter of 2024. The supply-side disruptions caused by the protests also contributed to an increase in food prices and overall inflation, with the Consumer Price Index increasing to 4.7% in February 2025 on a year-on-year basis, up from 2.5% in September 2024.
Debt management capacity challenges have also resulted in repeated occurrences of reported temporary arrears on debt service, including on domestic government bonds.
The Mozambican authorities have taken steps to improve cash-management processes, including a revamping of the debt database, and consolidation of the public accounts into the Treasury Single Account.
Moody’s said while the IMF programme has supported the reform momentum in these areas, it will take time for the reform efforts to enhance overall policy effectiveness.
The IMF Executive Board completed the fourth review under the program in July 2024, and discussions regarding the policies needed to complete the program are currently ongoing after the post-elections pause.
Reducing the wage bill, which analysts estimate at about 15% of GDP in 2024, remains the key fiscal challenge, given Mozambique’s very limited fiscal space to address large public investment and social spending needs.
The fiscal slippage in 2024 and expected reductions in external grants have reduced the fiscal space for the 2025 budget.
“The decision to affirm the foreign currency ratings reflects our expectations that the authorities will continue to prioritize the Eurobond repayments despite challenging liquidity conditions.
“While external commercial debt service has recently increased, with Eurobond coupon payments rising to 9% from 5% in 2024, the payments remain manageable until the only outstanding Eurobond matures between 2028 and 2031”.
This affords some time to the authorities to improve the foreign exchange generation capacity at the time of the amortization.
After protracted delays, Moody’s analysts expect the TotalEnergies SE’s project, which was suspended in 2021 due to force majeure, to restart operations following the recent reported re-approval of the financial support from the US Export-Import Bank.
The project remains key to supporting Mozambique’s growth and fiscal trajectory over the longer term. Even if the LNG production will not come on stream before 2029, progresses would likely improve the countries capacity to receive external funding.
However, further delays in the project coming onstream compared to our baseline would negatively affect Mozambique’s foreign currency generation capacity as would the lack of progress with the IMF over a programme.
Nevertheless, Mozambique’s fiscal and external vulnerabilities remain elevated due to high debt level, as we expect debt-to-GDP to average around 96% of GDP in 2025-26, large current account deficits that are only partially financed by foreign direct investment into natural resource sectors and low levels of foreign-exchange reserves.
The stable outlook reflects baseline expectation that Mozambique will continue to face fiscal pressures and liquidity challenges in the near to medium term amid institutional capacity constraints.
“As for the LNG project, we expect under our baseline that it will start by end of 2025 or early 2026 at the latest. Risks are balanced”.
Moody’s said downside risks to the credit profile include significant spending pressures to respond to social demands, potentially leading to wider fiscal deficits and further liquidity challenges, jeopardizing the IMF programme.
Reducing the public wage bill will be challenging in this context despite the authorities commitments. The political environment may weaken the appetite for further institutional and financial management reforms.
Difficult security conditions in Cabo Delgado could add pressure on government spending. Additional risks include further delays in the restart of the Total LNG project. “These risks are balanced by potential upside risks related to stronger economic and fiscal prospects than we currently expect due to an acceleration of the developing LNG sector”, Moody’s stated.
Credit positive developments could also stem from an acceleration of progress in institutional and financial management capacity through continued engagement with the IMF. #Moody’s Downgrades Mozambique’s Local Currency Rating Naira Tumbles as FX Demand Pressures Heat Up, Spread Reduces
