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
