Mozambique will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.
A deal to restructure a US$726.5 million eurobond is credit-positive for Mozambique.
However, the country’s debt and fiscal position are likely to remain challenging in the medium term.
Rogue elements of Renamo may resume attacks following elections, although a historic peace deal should remain intact.
Incumbent President Filipe Nyusi will retain the presidency for a second term following elections on October 15, 2019. Nyusi’s Frente de Libertação de Moçambique (Frelimo) party also increased its dominance, securing 184 of 250 parliamentary seats, from 144 previously.
Election results were challenged by opposition party-cum-rebel group Renamo, although on November 11 Mozambique’s Constitutional Court rejected a legal bid to annul the results.
The election results pose downside risks to Mozambique’s security environment. Renamo and Frelimo agreed a peace deal in August 2019, the terms of which included greater decentralization and the ability of each province to appoint a governor based on election results.
Renamo hoped to capitalize on these changes, but Frelimo ultimately secured control of each of Mozambique’s 10 provinces.
Along with accusations of vote-rigging, a weak electoral performance could prompt elements of Renamo to abandon the peace deal and resume attacks.
Any attacks are unlikely to be endorsed by Renamo’s leadership or mark a return to civil war, given that the deal includes many long-standing Renamo demands.
However, the leadership does not exert complete control over Renamo, and rogue elements may target transport infrastructure with firearms and arson attacks.
In September 2019, Mozambique’s government indicated that it had received support from 99.5% of bondholders to restructure the country’s US$726.5 million eurobond, which has been in default since January 2017.
Bondholders agreed to a new US$900 million bond, maturing in 2031. The bond will pay interest payments of 5% in the period to 2023, before rising to 9% as Mozambican gas exports come online.
An upfront payment of US$40 million was also made to bondholders.
The deal is a credit-positive step for Mozambique, and should contribute to reduced sovereign credit risks in the long term. However, sizeable downside risks remain.
Firstly, uncertainty persists over the status of US$1.2 billion in non-performing loans given to state-run security firm Proindicus SA and Mozambique Asset Management (MAM) in 2013.
Proindicus and MAM have failed to make principal or interest payments since 2016, while the Mozambican government is challenging the validity of a state guarantee given to Proindicus.
The outcome of these proceedings remains unclear, and will continue to limit Mozambique’s fiscal and debt credibility.
Moreover, Mozambique’s short-term fiscal and debt position remains precarious. Despite improving relations, the country is still unable to access International Monetary Fund (IMF) support and is locked out of international capital markets.
Gross general government debt is estimated at 101% of GDP in 2019, while financing needs will remain elevated as the fiscal deficit is forecast at 6.2% of GDP in 2019.
Exposure to currency risks also remains elevated, with 85% of debt foreign-currency denominated, while foreign exchange reserves cover just 2.3 months of current account payments.
This has also limited the government’s ability to support capital formation. Alongside the impact of Cyclones Idai and Kenneth in 2019, this will contribute to limited real GDP growth of 1.4% in 2019.
In June 2019, an American oil and gas multinational reached final investment decision (FID) on the country’s first onshore liquefied natural gas (LNG) project, providing further support to Mozambique’s efforts to become a major exporter of LNG.
The project, which was subsequently acquired by a French petroleum major, will see the development of two LNG trains with nameplate capacity of 12.88 million tons per annum to exploit offshore gas reserves.
First production is expected in 2024. Several other major projects will support a robust outlook for Mozambique’s oil and gas sector.
An Italian oil major's floating LNG project is expected to come online in 2022, while a major American oil and gas company is expected to reach FID on its onshore development in the coming months.
The government is likely to remain welcoming of foreign investment in the emerging LNG sector, given the sizeable fiscal returns on offer.
The state oil company also lacks the resources to effectively develop and exploit gas reserves.
This should moderate expropriation and/or contractual risks in the sector.
In the longer term, the government may seek to increase its stake in joint ventures to 35-40%, up from the current 10% norm.
However, the government’s tight financial position will limit its ability to secure increased stakes in the near term.
5 Key Takeaways
- The re-election of Filipe Nyusi poses downside risks to the security environment. Opposition party Renamo has limited political representation and may abandon the peace deal and resume attacks.
- In September 2019, Mozambique agreed the restructure of its US$726.5 million eurobond, which had been in default since January 2017. Bondholders agreed to a new US$900 million bond, maturing in 2031.
- The bond will pay interest payments of 5% in the period to 2023, before rising to 9% as Mozambican gas exports come online.
- However, Mozambique’s short-term fiscal and debt position remains weak. Mozambique is unable to access IMF support and is locked out of international capital markets.
- Exposure to currency risk also remains elevated with 85% of debt foreign-currency denominated, while foreign exchange reserves only cover 2.3 months of current account payments.
The monthly Risk Outlook is supported by our 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.