25 September 2018

Mozambique: Fitch Reaffirms Mozambique's Default Rating

Maputo — The ratings company Fitch has reaffirmed Mozambique's long-term foreign currency credit rating on "RD" or restricted default, according to a note released last Friday.

The "RD" credit rating indicates that the debt issuer has entered into financial default with respect to a bond, loan or other issue, but has not entered into bankruptcy and has not ceased trading.

The default refers to the scandal of what have become known as Mozambique's "hidden dents". These are the loans for over two billion US dollars taken from the European banks Credit Suisse and VTB of Russia in 2013 and 2014 by the three security-related companies Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management).

Repaying these loans became a government responsibility since illicit guarantees were issued by the government of the time, under President Armando Guebuza. Those guarantees smashed through the ceiling on loan guarantees established by the budget laws of 2013 and 2014. They also violated a clause in the Mozambican constitution stating that only the country's parliament, the Assembly of the Republic, can authorise such debt.

The largest loan, of 850 million dollars to Ematum, was public knowledge, since it took the form of a bond issue on the European market. But the other two loans, for almost 1.2 billion dollars, were kept secret until April 2016.

The discovery that Mozambique's public debt was much larger than believed led the International Monetary Fund (IMF) to suspend its programme with the country, and all 16 donors who used to provide direct support to the Mozambican state budget followed suit by suspending all further disbursements.

In 2016, the Ematum bonds were swapped for sovereign government bonds with a longer repayment time, but at a higher interest rate. Later that year, the government stopped paying the interest on these bonds, and made no further payments on the Proindicus and MAM loans.

The government insist that all three debts must be renegotiated - while Mozambican civil society organisations are calling for no repayment at all, since the debts were contracted illegally and should be considered "odious".

The Fitch statement recalled that, that since Mozambique's credit rating was revised down to "RD" in 2017, the country has already failed to pay four coupons on the ex-Ematum bonds, as well as both interest and capital repayment of Proindicus and MAM loans.

Contradicting Finance Minister Adriano Maleiane who said last week he expected an agreement with the creditors by December, Fitch "does not anticipate a near-term resolution to the default", since "key differences remain between bondholders and the government regarding the terms of a debt restructuring".

The creditors are yet to accept government proposals made in March "including haircuts (i.e. a reduction on the amount to be paid) on past-due interest, lengthening of maturities and lower coupon payments".

Fitch noted that inflationary pressures have greatly reduced. Mozambican inflation is now expected to be 4.6 per cent in 2018, far below the 15.1per cent recorded in 2017, although it is predicted to rise to 6.8 per cent and 8.0 per cent in 2019 and 2020, respectively.

Fitch expects economic growth to remain relatively low, at 3.5 per cent this year, rising slightly to 3.7 per cent in 2019.

"Economic growth is expected to accelerate from 2022/2023 when the major projects to explore natural gas deposits come online," Fitch said.

Fitch is one of the three main credit rating agencies, all based in the United States. The others are Moody's and Standard and Poor's.

Mozambique

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