Moody’s Investors Service (Moody’s) has today changed the government of Mozambique’s outlook to positive from stable and has, at the same time, affirmed its long-term issuer and senior unsecured debt ratings at Caa2.
The drivers of the positive outlook include prospects of broad-based improvements in Mozambique credit’s profile led by Liquified Natural Gas (LNG) production and the government’s efforts to strengthen public governance, which may improve over time policy effectiveness from currently very weak levels.
The next 12-18 months will be pivotal for Moody’s assessment of the extent to which LNG production levels and government’s management of future revenues will lead to sustainable improvements in the sovereign’s economic and fiscal strength.
The affirmation of the Caa2 rating is underpinned by persistent credit weaknesses suggesting a still-high risk of default. These include high government debt, susceptibility to foreign exchange risk as well as vulnerability to multiple sources of shocks, including security-related or climate-related.
Moody’s has raised Mozambique’s local currency (LC) country ceiling to B3 from Caa1 while the foreign currency (FC) country ceiling remains unchanged at Caa1.
Improved macroeconomic stability, from low levels, supported the 1-notch upward adjustment in the LC ceiling. At B3, the LC country ceiling is now two notches above the sovereign issuer rating, incorporating some degree of unpredictability of government actions, political risk and the economy’s reliance on commodity revenue.
The FC country ceiling at Caa1, one notch below the LC country ceiling, reflects a degree of transfer and convertibility risks, given consequent external imbalances and liabilities, a relatively closed capital account and constrained policy effectiveness.
Rationale for the positive outlook
Prospects of improving economic and fiscal strength as LNG production commences
LNG production will in time improve Mozambique’s economic and fiscal strength and thereby its credit profile. Production looks likely to start towards the end of 2022, albeit with the pace of ramp up in following years and extent to which that generates government revenue uncertain, implying a particularly wide range of possible outcomes.
Meanwhile, government spending pressure will remain elevated amid consequent infrastructure needs, security costs and social demand. Starting 2023, coupon payments due under the sovereign’s sole eurobond will also step up to 9% from 5% currently.
Mozambique’s most advanced LNG project in Area 4 will likely start production by the end of 2022. In the following years, production is likely to remain restricted to this project, which is relatively small in scale, as the two larger LNG projects remain less advanced, with the timeline for full completion not defined. Area 4’s developer ENI S.p.A. (Baa1 stable) targets an average annual production of 3.4 million tonnes of LNG per year, which could generate between 0.5% and 1% of GDP in revenue for the government annually from 2023 onward. Government revenues from this project primarily stem from profit petroleum, dependent on the evolution of prices set under complex production sharing contracts as well as cost recovery.
Progress on the second-most advanced project depends on TotalEnergies SE’s (A1 stable) resumption in the Golfinho/Atum fields Offshore Area 1 that was suspended after the company declared force majeure following Islamic State-linked militant attacks in the Cabo Delgado in April 2021. The third and largest project in the Rovuma basin still hasn’t reached final investment decision since joint-venture operators Exxon Mobil Corporation (Aa2 stable), ENI, and China National Petroleum Corporation (A1 stable) announced the postponement of their decision until further notice amid the pandemic outbreak.
Prospects for further improvement in public governance and policy effectiveness
In recent years Mozambican authorities have introduced several measures to strengthen public governance and have built a track record of preserving a degree of macroeconomic stability despite multiple shocks such as two cyclones in 2019 and then the pandemic.
The authorities have introduced measures to improve the efficiency of monetary policy channels, including through the deepening of capital markets and fostering development of the inter-bank market.
Monetary policy interventions have been particularly swift during the pandemic, supporting the central bank’s credibility .Improvements have also been made on the fiscal side: strengthening public expenditure control, modernizing budget programming, and enhancing budget execution and treasury administration have all achieved significant progress.
The authorities have also taken significant steps in recent years to tighten oversight of State-Owned Enterprises (SOEs).Moody’s expects that over time these efforts, especially if accompanied by a programme with the IMF, could improve Mozambique’s institutional strength.
Negotiations between the IMF and the Mozambican authorities kicked off in January 2022 after the country formally requested an Extended Credit Facility; such a programme would provide further momentum to the strengthening of Mozambique’s public governance and policy effectiveness. In particular, a programme with the Fund would provide greater confidence regarding the government’s management of future LNG revenues and extent to which they will lead to sustained improvements in Mozambique’s economic and fiscal strength.
Rationale for the affirmation of the Caa2 rating
Notwithstanding the potential upside from LNG production and increased revenues, the Caa2 rating reflects persistent credit weaknesses such as high government debt, susceptibility to foreign exchange risk as well as vulnerability to multiple sources of shocks. Persistent institutional weaknesses also weigh on Mozambique’s credit profile.
Mozambique’s government debt remains elevated at almost 100% of GDP, which is higher than the median of Caa-rated peers. The broader public sector debt is at almost 110%, which includes the debt of Empresa Nacional de Hidrocarbonetos, the SOE that has financed the government’ stakes in LNG projects. Exposure to a weakening of the local currency, the metical, against the dollar is high with 90% of government debt denominated in foreign currency (mostly US dollars).
Meanwhile, Mozambique is exposed to multiple sources of shocks and in particular security- or climate risk-related with limited economic and fiscal resiliency. The country’s very low-income levels, high poverty rate and the population’s limited access to basic services like education, healthcare, road networks and electricity constrain economic strength and capacity to withstand shocks.
Moreover, Russia’s invasion into Ukraine and subsequent policy responses in major markets increases the downside risks for the global macroeconomic outlook with elevated inflationary pressures due to high energy prices and a deceleration of economic activity; it also increases downside risks for Moody’s fiscal projections.
Finally, despite ongoing efforts to improve policy effectiveness, Mozambique’s institutional framework remains very weak as illustrated by the track record of mismanagement of public finances and government’s default on debt, as well as its very low rankings on the Worldwide Governance Indicators.
Environmental, social, governance considerations
Mozambique’s ESG Credit Impact Score is very highly negative (CIS-5), reflecting its very high exposures to social and governance risks and high exposure to environmental risk. Governance and income levels remain very weak, meaning that its resilience to S and E risks is low.
Mozambique’s exposure to environmental risks carries high credit risks, reflected in its E-4 issuer profile score. Exposure to physical climate risk is prominent at a very high level while other environmental considerations carry less risks.
The primary sector is key for the economy and dominated by subsistence agriculture which is less resilient than sophisticated agriculture to climate-related disruptions due to weak irrigation infrastructure or agricultural techniques.
As Mozambique ramps up its LNG production, the government will increasingly be exposed to carbon transition, but that will take many years to unfold. Meanwhile, Mozambique’s key environmental exposure will remain climate risk related.
Exposure to social risks is very highly negative (S-5 issuer profile score) mainly driven by very poor access to basic services, education, health and safety. Poverty, unemployment, and lack of development are key issues driving security challenges in the north of the country, with sporadic Islamist attacks.
The Mozambique’s population is spread across the country’s vast territory rendering the provision of access to public goods and services country-wide even more challenging.
Mozambique has a highly negative governance profile score (G-5 issuer profile), reflecting particularly weak public financial management and reporting. Worldwide governance indicators are very weak, as has been the track record of public governance evident in the mismanagement of debt contracted by state-owned enterprises. While authorities have taken several important steps to address these issues, it will take time and further more significant progress before the governance profile score improves. These aspects underpin its very low resilience to shocks and capacity to respond to social or environmental risks and are the main driver of the CIS-5.GDP per capita (PPP basis, US$): 1,297 (2020 Actual) (also known as Per Capita Income)Real GDP growth (% change): -1.2% (2020 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 3.5% (2020 Actual)Gen. Gov. Financial Balance/GDP: -5.1% (2020 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -27.2% (2020 Actual) (also known as External Balance)External debt/GDP: [not available]Economic resiliency: caa1Default history:
At least one default event (on bonds and/or loans) has been recorded since 1983.On 08 March 2022, a rating committee was called to discuss the rating of the Mozambique, Government of. The main points raised during the discussion were: The issuer’s governance and/or management, have marginally increased. The issuer’s fiscal or financial strength, including its debt profile, has marginally increased.
Factors that could lead to an upgrade or downgrade of the ratings
Factors that could lead to an upgrade
Firmer prospects of significant economic and fiscal improvement from LNG production could lead to a rating upgrade. In particular, should revenue streams from Area 4’s LNG project appear meaningful in the next years, that would exert upward rating pressure as would advancement of the two other, larger but less advanced LNG projects. Continued improvement in Mozambique’s public governance would also be supportive of a rating upgrade. In such a scenario, Mozambique’s capacity to reap some of the credit benefits of the LNG projects would improve, which would be more likely to materialise as part of an IMF programme.
Factors that could lead to a downgrade
The positive outlook signals that a rating downgrade is unlikely over the near term. Moody’s would change the outlook to stable if the economic and fiscal gains from LNG production were expected to remain modest because of further delays in Mozambique’s LNG projects or any factors that would limit government revenue derived from LNG production. A significant deterioration in the security situation in the country could also exert downward pressure on the ratings.
Moody’s would consider downgrading Mozambique’s ratings if the government misses a coupon payment or indicates intentions to restructure further its private sector debt, including its outstanding bond, with investors’ losses likely above 20%.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.