Fitch Affirms Mozambique's Foreign Currency IDR at 'RD'.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The rating affirmation reflects the sovereign's inability to cure the default on debt to external commercial creditors. Since Fitch downgraded Mozambique to 'RD' in November 2016, the sovereign has missed two coupon payments on its sole Eurobond, as well as principal and interest payments on guaranteed loans to state-owned companies Proindicus and Mozambique Asset Management.
There has been very little progress regarding resolution of the sovereign default. Fitch expects the process of debt restructuring to be protracted, given uncertainty around the timing and sequencing of steps needed for talks to advance.
In June, the Attorney General published a summary of a Kroll audit of USD2 billion in borrowing by state-owned enterprises (SOEs) - agreed to as a first step for potential renewal of a lending facility with the IMF. However, the IMF has indicated the audit has not fulfilled its preconditions of transparency given information gaps regarding the use of a large share of the loan proceeds, specifically USD500 million in proceeds the auditor was unable to account for, and USD713 million in potential over-invoicing. Local political sensitivities could complicate further disclosures by the government. Fitch believes resumption of an IMF programme is unlikely in the near term.
The path forward on debt renegotiation remains unclear in the absence of progress on an IMF programme, as some creditors have suggested this as an important prerequisite for discussions to begin. It also remains unclear how potential inter-creditor disputes could evolve. Bondholders recently affirmed their position that restructuring should focus on the SOE loans, but the authorities have stuck to pledges of equal treatment of private creditors.
An additional uncertainty facing debt talks is how they could be affected by the potential fiscal windfall from gas projects (which could come online as soon as 2022) and recovery in the local currency. Although these factors both stand to improve sovereign debt service capacity, it is unclear how it could affect the bargaining positions of the government and creditors.
Public finances remain under stress, prompted by suspension in foreign grants and economic deceleration resulting from the debt debacle. Official data show large spending reductions so far in 2017, driven primarily by under-execution of capex (forced by financing constraints) and subsidy cuts; however, official data on a cash basis do not capture growing supplier arrears reported to have accumulated, and thus could significantly understate fiscal imbalances on a commitment basis. Fitch projects a modest narrowing in the fiscal deficit to 6.8% of GDP in 2017, from 7.0% in 2016. The 2018 budget targets roughly 2pp-of-GDP in deficit reduction, but the spending restraint this requires could be difficult to achieve in Fitch's view (especially in the high and rigid wage bill).
External financing constraints have led the government to draw heavily on credit from the central bank up to the legal limit. Fitch projects debt will fall to 94% of GDP in 2017 from 114% in 2016, capturing a jump in domestic debt offset by a much larger fall in external debt due to the recovery of the metical. The vast majority of sovereign debt is denominated in foreign currency, rendering solvency and liquidity metrics highly sensitive to the exchange rate.
Despite persisting fiscal risks, some stabilisation in the broader macroeconomic picture has continued. A surge in commodity exports and slowdown in imports have led to a significant reduction in the current account deficit net of foreign direct investment, and supported a 30% appreciation of the metical as of late October relative to the prior year. Central bank reserves recovered to USD2.5 billion in August from a low point of USD1.9 billion in October 2016.
Inflation has fallen swiftly in the past year, to 11% in September 2017 from 26% a year earlier, on tight monetary policies, metical appreciation, and a favourable base effect. Lower inflation has provided some space for the central bank to loosen policies, including policy rate cuts in April and October, but support for the broader economy could be blunted by a crowding-out effect given heavy sovereign domestic borrowing.
The economy has avoided recession through the on-going sovereign debt crisis, but a recovery is being restrained by lingering spill-overs on domestic demand via weaker public investment, credit availability, real wages, and confidence. Real GDP growth of 3% (year-on-year) in 1H17 mostly reflected a surge in export volumes in extractive sectors (namely due to better prices and logistical improvements boosting coal shipments), but the non-extractive economy grew just 1.2%. Fitch expects growth of 4.2% for the year as a whole.
Mozambique's favourable demographic profile and vast natural resources support strong growth prospects relative to peers, and there have been positive signs in recent months that long-awaited megaprojects in the gas sector could finally be materialising. In June, energy firm Eni signed a deal to move forward with a large gas project (Area 4), and Anadarko has announced it could reach a final investment decision on an even larger project (Area 1) in 2018.
The banking system remains a weak spot in the broader macro picture. Banks have seen their asset quality suffer from spill-overs of the sovereign debt crisis, via exposures to local firms affected by government arrears, and to the defaulted SOE loans in some cases. The central bank has intervened in several failing banks, and has imposed tighter capital adequacy and liquidity requirements that could encourage consolidation and support stability in the sector.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
In line with Fitch's published criteria and reflecting the fact that Mozambique remains in default on its commercial debt obligations, the sovereign rating committee has not utilised the SRM output and has maintained the Long-Term Foreign-Currency IDR at 'RD'.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The curing of the default, such as through a debt restructuring leading to a normalisation of relations with creditors would lead to an upgrade of the Long-Term Foreign-Currency IDR. At such time, Fitch would review Mozambique's ratings and upgrade the ratings to a level consistent with the sovereign's ability and willingness to service debt, as well as its economic fundamentals.
Fitch assumes that broad political stability will be maintained despite sporadic skirmishes between government forces and guerrillas associated with the main opposition party RENAMO.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'RD'
Long-Term Local-Currency IDR affirmed at 'CC'
Short-Term Foreign- and Local Currency IDRs affirmed at 'C'
Country Ceiling affirmed at 'B-'
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 5, 2018|
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