Mozambique’s Caa3 rating captures risk of sizeable losses for private creditors from default

MAPUTO (Capital Markets in Africa) – Mozambique’s Caa3 credit rating and negative outlook reflect Moody’s expectations that the ongoing default event will result in sizeable losses for private creditors, Moody’s Investors Service said in an annual report today.

The report, “Government of Mozambique — Caa3 Negative, Annual credit analysis”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“Mozambique’s government has not made payments on several debt instruments since the beginning of 2017, pending a restructuring,” said Lucie Villa, a Moody’s Vice President – Senior Analyst and co-author of the report. “The government’s track record of defaults indicates its low willingness to prioritise debt payments.”

The negative outlook on the rating reflects risks related to losses for private sector creditors. The government may seek to impose larger losses to private creditors, which would increase the likelihood of the IMF being willing to provide financial support.

Mozambique’s very weak institutional framework is a key credit challenge that is exemplified by the non-reporting of loans guaranteed by the government of two state-owned enterprises, Mozambique Asset Management (MAM) and Proindicus. Marked shortcomings in data reporting are another challenge.

The government’s fiscal strength is assessed as being “Very Low (-)”, reflecting high and rising government debt levels and high financial exposure to currency weakness. High government debt — which stood at 102% of GDP in 2016 – and a lack of access to financing, especially external, to cover fiscal deficits and debt payments, are credit constraints.

Mozambique’s economic strength is categorised as “Low (+)”, based on the economy’s small size, limited diversification, poor though developing infrastructure, and low per capita incomes. However, the country has good long-term growth prospects. Unlocking its liquefied natural gas potential would be a game changer for Mozambique’s export performance, its overall economy, as well as for government revenues.

Moody’s forecasts that Mozambique’s GDP growth will rise to 4.7% in 2017 from 3.8% in 2016. This is lower than the historical level as low commodity prices and diminished project implementation in the mineral sector affected growth.