Mozambique: Missed payment reflects severe sovereign credit risks

04 July 2017

Sovereign credit risks in Mozambique have been severely elevated since 2016, following the revelation of previously undisclosed debt and a missed interest payment in January 2017. Debt restructuring talks are increasingly likely to end without a deal, forcing widespread cuts to recurrent social spending. The government’s debt position will elevate contract alteration risks, particularly in the hydrocarbons sector. However, expropriation risks for agribusiness companies remain low.

Security Environment

The risk of civil war in Mozambique has fallen since May 2017, when an indefinite ceasefire was announced by opposition party-cum-rebel group Resistência Nacional Moçambicana (Renamo). Ongoing talks between the government and Renamo may collapse over the issue of political and economic decentralisation. However, in the near term the risk of hit-and-run attacks on road traffic by Renamo militants will be significantly reduced. Historically, Renamo have not targeted assets in commercial centres, preferring arson and gun attacks on cargo travelling along main roads, including the EN7 road to and from Beira port.

Theft of agricultural products by criminal groups remains a risk in Mozambique. In February 2017, police arrested five people following the theft of 20 tons of wheat from a freight train which was travelling between Beira and Zimbabwe, whilst in January police recovered 30 tons of rice which was stolen from warehouses in Beira.

Anticipated cuts to social spending in 2017 and 2018 will raise the risk of civil unrest, as subsidy cuts elevate inflation. Protests by youth and civil society groups may turn violent, posing property damage and injury risks. In 2010, following the removal of wheat flour subsidies, protests in urban areas ended in six deaths after police fired on protestors. However, commercial assets are unlikely to be directly targeted in any incidents.

Trading Environment

Sovereign credit risks in Mozambique are significantly elevated. In April 2016, the revelation that the government held an additional USD 1.4 billion in public sector debt, lead the International Monetary Fund (IMF) to suspend financial support.

In January 2017, Mozambique failed to honour a USD 59.8 million interest payment on a 2023 bond, before missing a 15-day grace period. In October 2016, the government began discussions with its creditors to restructure government issued and guaranteed debt and there is a growing risk that a deal will not be reached. The Mozambican government is refusing to abandon its commitment to equal treatment for all creditors. Bond holders had expected to be prioritised over bilateral creditors, due to legal inconsistencies in the government’s borrowing from the latter group. Without a deal, Mozambique will be unable to resume access to concessionary lending from the IMF or access international credit markets, making a further default likely.

With reduced financing options, the government will be forced to manage the fiscal deficit through widespread cuts o recurrent social spending, including subsidies for basic goods. In March 2017, the government announced that subsidies on wheat flour production would end.

Investment Environment

The government’s debt position means that it is increasingly likely to expand its stake in the nascent hydrocarbon sector, raising contract alteration risks. In 2014, the fifth licensing round for liquefied natural gas and petroleum concessions involved a requirement that 25% of production be sold domestically and that foreign companies must have Mozambican partners. It is also likely that future joint ventures will expand the National Hydrocarbons Company’s stake from 10% to 35%.

There is a low expropriation risk in Mozambique, despite a period of nationalisation following independence in 1975. Mozambique is a member of the Multilateral Investment Guarantee Agency and regulations issued in 2009 guarantee that investments will not be expropriated. In agribusiness, the continuing negative impact of dry weather from the 2015/16 El Niño climate cycle on agricultural production will make Mozambique increasingly reliant on the import of key commodities. This will limit the risk that the government will seize stores of agricultural products as it will be keen to avoid shortfalls by ensuring continued participation by foreign companies.

Mozambique: Missed payment reflects severe sovereign credit risks

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Qatar, Philippines, Brazil and Saudi Arabia, all of which have been the subject of recent enquiries from JLT's client base.

Qatar: Embargo causes extensive business disruption

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download July Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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