Moody’s Downgrades Mozambique’s Economic Outlook to Stable Amid Fiscal and Debt Repayment Challenges
The financial rating agency, Moody’s, has downgraded Mozambique’s economic outlook from positive to stable.
This change in perspective reflects their prediction of further delays in domestic debt payments and unexpected delays in implementing reforms. According to Moody’s, Mozambique is expected to continue facing fiscal pressures and liquidity challenges due to short- and medium-term institutional capacity constraints. These challenges might potentially lead to additional delays in debt repayments, as reform efforts to strengthen the country’s debt management and treasury capacity are still underway.
The Continuing Fiscal Pressures
Maintaining the country’s rating at Caa2, which is below the investment recommendation level, Moody’s indicates that budgetary pressures will continue to be a challenge. These pressures are expected to persist due to public sector wage reform, security challenges in the north of the country, and upcoming elections. Additionally, the state’s liquidity risk is predicted to remain high, given the difficult maturity profile of domestic debt.
Delays in Domestic Debt Repayments
The main takeaway from the Moody’s report is that Mozambique is facing significant economic and fiscal challenges. These challenges are expected to continue due to institutional capacity constraints and a difficult debt profile. As a result, more delays in domestic debt repayments are likely. This prediction paints a challenging picture for the country’s financial future.
Mozambique’s Liquified Natural Gas (LNG) Potential
Despite the current fiscal challenges, Mozambique’s credit profile has prospects of broad-based improvements. This is largely due to the expected commencement of Liquified Natural Gas (LNG) production and the government’s efforts to strengthen public governance. The next 12-18 months will be pivotal in assessing the extent to which LNG production levels and the government’s management of future revenues will lead to sustainable improvements in the sovereign’s economic and fiscal strength.
Addressing Persistent Credit Weaknesses
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.
Efforts to Strengthen Public Governance
The Mozambican authorities have introduced several measures in recent years to strengthen public governance. This includes improving the efficiency of monetary policy channels, strengthening public expenditure control, modernizing budget programming, and enhancing budget execution and treasury administration. These efforts, especially if accompanied by a programme with the IMF, could improve Mozambique’s institutional strength and potentially lead to sustained improvements in the country’s economic and fiscal strength.
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