Mozambique Delays Debt Payments Obligations

Between late February and March, the Government of Mozambique missed principal and interest payments on several domestic bonds worth $94.6 million due to domestic banks as cyclone ravaged the country.

In a commentary, Moody’s said it considers the payment miss an event of default on domestic debt, though payments on all the domestic bonds were eventually made within 10 working days at the latest, curing the default with minimal losses for investors.

As a result, Moody’s analysts said they still view Mozambique’s credit profile as being consistent with a Caa2 rating, which typically implies investor losses below 20%.

“We note that the Eurobond coupon payment was paid on time and in full in mid-March”.

Cash-management issues and temporary increases in liquidity pressures were largely responsible for the missed payments. Liquidity pressures emerged in the context of unusually high debt repayments and higher-than-foreseen spending exacerbated by the effects of Cyclone Freddy, which also weighed on revenue collection.

Technical issues, including the lack of an established process for the Ministry of Finance to rapidly draw on resources from its accounts at the central bank, also played a role.

Both credit features of weak liquidity and cash management capacity are already reflected in the rating of Mozambique, according to Moody’s analysts.

The positive trends that led to the assignment of a positive outlook in March last year remain in place, including progress on institutional reforms and the economic and fiscal gains prospect of a growing LNG sector that were key drivers of our decision.

However, analysts said it will take time for reforms to public financial management to enhance overall policy effectiveness, as the recent missed payments episode demonstrated.

The authorities are introducing measures to improve cash-management processes and to prevent commercial payment delays recurring, including a mechanism to allow for the timely drawdown of the government’s deposits at the central bank during an emergency.

There is also a new procedure in place that allows the transfer of funds to the Treasury account used for debt service within a maximum of two days.

Moody’s analysts expect the ongoing IMF program to strengthen debt management and provide an anchor for gradual fiscal consolidation, although fiscal risks remain.

A weaker-than-expected fiscal performance in 2022 related to the challenges the government faced in implementing changes to public sector remuneration has been a driver of recent pressures on spending.

The government is putting in place corrective measures in order to contain the cost of the reform going forward. The IMF programme is also helping to establish a fiscal framework to better manage its liquified natural gas (LNG) windfalls.

Parliament is currently discussing the draft law to create a sovereign wealth fund, which the authorities expect will be approved already in April this year.

Recent events also highlight the credit effects of Mozambique’s susceptibility to increasingly recurrent and severe climate shocks. Cyclone Freddy has caused significant economic and human losses and displaced over 184,000 people, channeling government resources for humanitarian aid to the affected regions.

The country is putting in place actions to increase its resilience to climate shocks like measures to address financial risks from natural disasters (including cyclone insurance) as well as adaptation measures, including strengthening climate resilience criteria in public investment planning with the assistance of international financial organizations.