Moody’s downgrades Mozambique to negative outlook over debt metrics

Moody'sMoody’s Investors Service has downgraded Mozambique’s government issuer rating from B1 to B2 and changed the outlook to negative due to underperformance of its fiscal and development metrics.

A statement issued by Moody’s and copied to ghanabusinessnews.com, said the key driver for the decision to downgrade Mozambique’s rating to B2 is the underperformance of its fiscal and debt metrics in comparison with its peers, which is expected to continue over the medium-term.

“The negative outlook reflects uncertainties over the government’s strategy for covering its
increasing external debt payments in foreign currency”, the statement said.

Moody’s said it has concurrently lowered all long-term ceilings by one notch: The foreign currency deposits ceiling has been lowered from B2 to B3, the foreign currency bond ceiling has been changed from Ba3 to B1, and the local currency bond and deposits ceilings have been lowered from Ba2 to Ba3.

Moody’s has also assigned Not Prime short-term ceiling.

To mirror the changes in the rating and the outlook of the Mozambican government, Moody’s has in addition downgraded the backed senior unsecured foreign-currency rating of Mozambique EMATUM Finance 2020 B.V. (the EMATUM bond which takes the form of a $850 million loan participation note issued in September 2013 by a special purpose vehicle of Mozambican fishing company EMATUM) from B1 to B2 and changed the outlook from stable to negative.

Moody’s forecasts that the government’s debt will continue to increase and likely reach 60 per cent of GDP in 2015-16 due to large fiscal deficits and depreciation against the dollar.

The rating agency notes that this constitutes a substantial deterioration compared to its 2011 level, when it stood at 37 per cent, and exceeds the median ratio of B1 rated sovereigns of 48 per cent (2015F).

The statement noted that the Mozambican government had ran large fiscal deficits resulting from high capital expenditures in 2014, fast-growing current spending and decreasing grants from the international community.

Though Moody’s forecasts that fiscal deficits will decrease to 5.7 per cent of GDP in 2015 and to 5.1 per cent in 2016, it believes a more pronounced fiscal consolidation is unlikely because of the observed rigidity in current spending and the limit to which capital spending can be cut without hurting the Mozambican government’s efforts to upgrade the country’s infrastructure and enhance growth potential.

Mozambique’s high share of foreign currency denominated debt and the depreciation of the country’s currency (Mozambican Metical) against the dollar were cited by Moody’s as compounding elements in its debt situation.

The statement noted that with a steadily depreciating currency and 87 per cent of government’s debt in foreign currency as at the end of 2014, the stock of government debt and annual debt servicing increase when expressed in the local currency.

Moody’s said that as at the first quarter of 2015, the nominal exchange rate of the Metical had depreciated 9 per cent when compared to the last quarter of 2014, and 19 per cent compared to the third quarter of 2014.

By Emmanuel Odonkor

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