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Rating Action:

Moody's upgrades Mozambique's ratings to Caa2, maintains stable outlook; assigns (P)Caa2 rating to the forthcoming bond; affirms the 2023 bond rating at Caa3

20 Sep 2019

Paris, September 20, 2019 -- Moody's Investors Service ("Moody's") has today upgraded the Government of Mozambique's long-term local-currency and foreign-currency issuer ratings to Caa2 from Caa3 and maintained the stable outlook. It also assigned a (P)Caa2 foreign-currency senior unsecured debt rating to the new bond that will be issued at the end of the month in exchange of the existing 2023 bond. Moody's has also affirmed the Caa3 foreign-currency senior unsecured debt rating on the 2023 bond.

The government announced on 9 September that bondholders have agreed to exchange Mozambique's sole bond, due in 2023 and in default since early 2017, against a new bond of longer maturity and lower coupon. At this advanced stage in the process, Moody's assumes that the bond restructuring will proceed. The issuer ratings upgrade reflects an incremental improvement in the still very weak credit profile of the government of Mozambique post-bond restructuring. It assesses that the restructuring will provide slight financial relief to the government, lower litigation risks and improve the prospects of Mozambique entering an IMF programme in the next few years that would ease government liquidity, drive credit-positive policies and enhance policy effectiveness.

The Caa2 ratings still indicate a high risk of default for private creditors given that government debt will remain very high and that access to funding will remain constrained. Economic and institutional weaknesses, especially in relation to public governance, will also remain strong credit constraints.

The stable outlook reflects Moody's expectation that the government will work towards securing an IMF programme. Although this will likely be a lengthy process, this will provide further incentives to the government to remain current on its coupon payments. The stable outlook also assumes that the government's access to funding will remain highly constrained but will not deteriorate further.

Concurrently, Moody's has raised Mozambique's long-term foreign-currency bond ceiling to Caa1 from Caa2. All other ceilings remain unchanged with the long-term foreign-currency deposits ceiling at Caa3, the long-term local-currency bond and deposit ceilings at Caa1 and the short-term foreign-currency bond and deposit ceilings at Not Prime (NP).

RATINGS RATIONALE

ISSUER RATINGS UPGRADE TO Caa2 FROM Caa3

SLIGHT FINANCIAL RELIEF FOLLOWING THE DEBT RESTRUCTURING

The approved bond exchange slightly alleviates the Government of Mozambique's liquidity pressures by reducing the coupon payments compared to the original obligations. There is no visibility at this stage over a potential restructuring of Mozambique debts other than the 2023 bond.

Under the new bond, the government will pay almost $40 million to bondholders in 2019 (0.3% of GDP) and 5% coupon payments from 2020 to 2023, which is below the 10.5% coupon under the existing bond. Moody's estimates this will reduce the government's interest bill by around 0.2% of GDP during that timeframe.

However, the servicing of the new bond will remain challenging given the government's constrained access to funding, especially in foreign currency. Moody's estimates the government's overall borrowing needs to cover debt payments and fiscal deficits at 20-25% of GDP. Financial support from international donors and lenders is limited while access to international capital markets will likely remain out of reach, following the government's history of defaults and under-reporting of financial liabilities. Beyond 2023, when the government should receive additional revenues from several Liquified Natural Gas (LNG) projects under development, the coupon rate on the new bond will step up to 9%, exposing the government's servicing capacity to risks to delays in LNG proceeds.

Moreover, the impact of the restructuring on government debt ratios at face value is limited given the minimal haircut on the principal implied. The principal of $726 million on the 2023 bond, plus past but not paid coupon payments of about $250 million compare to the $900 million principal on the new bond plus an up-front cash payment of a bit less than $40 million to bondholders.

Government debt ratios, which Moody's estimates at 100% of GDP in 2018 and 386% of revenue, will likely remain elevated in the medium term. The government faces spending pressures, especially in relation to the devastating impact of the cyclones earlier this year, and the infrastructure needs to accompany the development of the LNG projects. Moreover, broader public sector debt will likely rise, driven by the national gas company's, Empresa Nacional de Hidrocarbonetos, financing of its stakes in the various gas projects.

LOWER RISK OF LITIGATION BY HOLDERS OF THE 2023 BOND

The bond restructuring reduces the risk of litigation by the holders of the existing bond, itself a restructured instrument from the government's EMATUM notes default in March 2016. That exchange, which Moody's considered a distressed exchange, occurred just a few months before the government revealed previously unreported foreign-currency denominated debt. State-owned-enterprises (SOEs) Mozambique Asset Management (MAM) and Proindicus had taken loans worth $1 billion, with short tenor and a government guarantee without the debt being reported, underscoring weak public finance governance in Mozambique.

PROSPECTS OF AN IMF FINANCING PROGRAMME

The bond restructuring opens the prospects of renewed financial support from the IMF and the broader international community. The bond exchange will likely allow Mozambique to meet the IMF's final condition for a financing programme. This condition entails a more sustainable path for Mozambique public and publicly guaranteed debt which would enable Mozambique to exit the IMF's "distressed" debt sustainability assessment category. Given the country's humanitarian needs following two cyclones earlier this year, exiting the debt distress category and reengaging with the international community may unlock additional, broader support.

The IMF ceased disbursements from its Standby Credit Facility programme in 2016 after the government disclosed debts contracted by SOEs MAM and Proindicus. The IMF stipulated three conditions for financing to resume, two of which have been broadly met: tight monetary policy since October 2016 has contributed to macroeconomic stability, while the completion of an audit of undisclosed loans in June 2017 was a step towards greater transparency in the SOEs sector and improving public governance.

Negotiations over an IMF programme are likely to be lengthy. They should nonetheless provide further incentives to the government to remain current on its coupon payments in the near term.

(P)Caa2 FOREIGN-CURRENCY SENIOR UNSECURED DEBT RATING ASSIGNMENT TO THE NEW BOND

Moody's expects that the bond planned for issuance as part of the exchange scheduled for the end of September will represent a senior unsecured debt obligation from the Government of Mozambique. As a result, Moody's has assigned on a provisional basis a (P)Caa2 rating in line with the Government of Mozambique's Caa2 foreign-currency issuer rating. Moody's would assign a definitive rating upon completion of the restructuring and confirmation of the final terms and conditions of the new instrument.

AFFIRMATION OF THE Caa3 FOREIGN-CURRENCY SENIOR UNSECURED DEBT RATING ON THE 2023 BOND

The affirmation of the Caa3 foreign-currency senior unsecured debt rating on the 2023 bond reflects Moody's expectation that the ultimate loss to bondholders, at the exchange date, will be in the 20-35% range, in line with the indicative range of loss for Caa3-rated defaulted debt.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the government will work towards securing an IMF programme in the next few years, although, as mentioned, this will remain a lengthy process. Prospects of an IMF programme may ease access to funding slightly and further motivate the government to remain current on servicing of the new bond, reducing the risk of a default in the near term.

The stable outlook also reflects Moody's assessment that the government's access to funding will remain highly constrained, although Moody's does not expect a significant deterioration in access to funding. The government's arrears to goods and services providers (8% of GDP) and its reliance on lending from Government of China (A1 stable) and a few other official sector lenders will likely continue.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

As mentioned above, Moody's assessment of Mozambique's very weak governance underpins its ratings.

Environmental considerations weigh on Moody's assessment of Mozambique's economic and fiscal strengths. Recurring natural disasters, including cyclones and droughts, hamper Mozambique's growth potential in an economy reliant on agriculture with weak irrigation infrastructure and where food constitutes a large proportion of the consumption basket. Moreover, the government's capacity to buffer the impact of natural disasters is very limited given very narrow fiscal flexibility and weak institutions.

Social considerations including very low wealth levels and limited access to quality basic services such as education, health care, access to roads, and electricity, and pervasive poverty also constrain Mozambique's development and economic strength, as is the case in a number of frontier market countries.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's would likely upgrade the Government of Mozambique's ratings if prospects of significant reforms in public governance and sustained fiscal consolidation emerged and enabled the government to reap some of the credit benefits of the LNG projects. Such developments would be more likely to materialise as part of an IMF programme.

Conversely, should the government miss a coupon payment or indicate intentions to restructure the new bond, Moody's would likely downgrade the ratings, especially if investors' losses appeared likely to be above 20%. Significant delays in the start of the LNG production planned for 2023 could lead to rising government debt stock and result in a new bond restructuring.

GDP per capita (PPP basis, US$): 1,291 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.3% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.5% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -5.3% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -34.7% (2018 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 18 September 2019, a rating committee was called to discuss the rating of the Mozambique, Government of. The main points raised during the discussion were: the credit impact of the forthcoming bond exchange. The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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