Mozambique rating affirmed as finance remains difficult

Mozambique’s long-term foreign currency issuer default rating has been affirmed by Fitch at RD (restricted default), as the country admits there is no short-term fix for its debt problems. Fitch said the 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 three coupon payments on its sole Eurobond, as well as principal and interest payments on government-guaranteed loans to state-owned companies Proindicus and Mozambique Asset Management. The government held a presentation to creditors on 20 March. In addition to providing an update on the country's economic outlook, government representatives unveiled some restructuring guidelines and options, which include haircuts on past-due interest, lengthening of maturities and lower coupon payments. The government reiterated its position that both Eurobond and guaranteed loans will be subject to restructuring. While renewed engagement with the creditors is a positive development after a long hiatus, the timing and length of debt restructuring talks is unclear. Fitch does not anticipate a near-term resolution to the default. Key differences remain between bondholders and the government regarding the terms of a debt restructuring, including the treatment of different classes of defaulted debt (Eurobond vs SOE government-guaranteed loans). There are limited prospects in the near term of an International Monetary Fund programme, as the fund continues to urge the government to fill in the critical information gaps identified in the June 2017 Kroll audit on the $2bn hidden debt. On the domestic front, the Attorney General Office continues its investigation on the hidden debt. The timing of this process remains uncertain, as the political ramifications of the investigation could hamper or delay the process, especially as municipal elections are scheduled for October 2018 and national elections are expected to take place a year later. Mozambique's growth prospects have materially weakened from levels achieved prior to its default, when it averaged 7.1% between 2011 and 2015. Despite improved weather conditions, higher commodity prices and large increases in coal production, official estimates show that growth decelerated to 3.7% in 2017, from 3.8% in 2016. Fitch expects Mozambique to average 3.5% growth in 2018-2019 under a scenario of continued external financing constraints, uncertainty regarding the resolution of the dispute with creditors, high real rates and limited linkages to the domestic economy of the confirmed offshore gas project (ENI) during the construction phase. A final investment decision on Anadarko's onshore project could be made in 2019. Inflation remains low (2.9% in February) in early 2018 despite the increased volatility of the metical. The Bank of Mozambique has signalled it will ease monetary conditions with caution, given risks from public finances, food prices and exchange rate volatility. The financial sector has stabilised but remains vulnerable due to the prospects of sustained low growth and large exposure to the public sector. Non-performing loans (NPL) rose to 12.1% at the end of 2017, from 6.9% in 2016. Banks have created provisions accounting for 69% of total NPLs. The ruling party FRELIMO has achieved a deal with opposition RENAMO to finalise a peace agreement based on allowing for greater decentralisation and the integration of RENAMO fighters in the security forces, both of which require constitutional amendments.

Mozambique rating affirmed as finance remains difficult

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