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Moody's downgrades Mozambique to B3, maintains review for downgrade.

Moody's Investors Service has downgraded Mozambique's issuer rating to B3 from B2, maintaining the rating on review for downgrade.

This review extends the review for downgrade of Mozambique's sovereign rating initiated on 17 December 2015.

In a statement, Moody's said that the key driver for the rating downgrade is Mozambique's deteriorating balance of payments position and reduced capacity for the government to service its outstanding debt, as evidenced by declining foreign exchange reserves of the Bank of Mozambique and the government's decision to initiate a debt exchange offer to reduce the drain on foreign exchange reserves in coming years.

The continuing review for downgrade will allow Moody's to assess the implications of the proposed debt exchange on the government's willingness and capacity to service its debt obligations. The EMATUM notes exchange proposal, announced on 9 March 2016, will likely constitute a distressed exchange according to Moody's definition.

Moody's will also assess the potential severity of the pressures on Mozambique's balance of payments and the reserve position of the Bank of Mozambique in the absence of a permanent liquidity backstop.

Concurrently, Moody's lowered Mozambique's foreign-currency deposit ceiling to Caa1 from B3, and local-currency bond and deposit ceilings to B1 from Ba3.The foreign-currency bond ceiling remains unchanged at B1.

Moody's decision to downgrade the issuer rating of the government of Mozambique primarily reflects pressures on Mozambique's balance of payments and the further decrease expected in the Bank of Mozambique's foreign exchange reserves.

The Bank of Mozambique's foreign exchange reserves were $2.3 billion at the end of 2015, down from their peak level of $3.2 billion reached in August 2014. Strong pressures on the foreign exchange reserves developed in mid-2014 and ultimately led to the provision of $285 million short-term funding by the IMF in December 2015, of which $120 million was immediately disbursed to help cover the widening external financing gap.

Moody's said that pressures came primarily from low commodity prices and fast growing imports-related to general consumption only, not to mega-projects-which grew eight per cent in dollar terms over the first three quarters of 2015 compared to the same period in 2014. Bank of Mozambique intervention in the foreign exchange market at the end of 2014 and in early 2015 to support the Mozambican Metical also weighed on foreign exchange reserves and likely slowed imports adjustment.

Moody's believes that foreign exchanges reserves will continue to fall in 2016, despite the expected disbursement of the remaining $165 million under the IMF's Short Term Credit Facility, lower government external debt service following the debt exchange and the expected contraction in imports. Subdued commodity prices, delays in foreign megaprojects, including in the Liquefied Natural Gas (LNG) sector, will continue to weigh on the balance of payments going forward.

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Publication:CPI Financial
Geographic Code:6MOZA
Date:Mar 16, 2016
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