Sovereign credit risks remain elevated in Mozambique

04 February 2019

Sovereign credit risks in Mozambique will remain elevated in 2019, despite the government reaching a deal to restructure its 2023 Eurobond. In the long term outlook, liquefied natural gas (LNG) production should improve the debt position. Terrorism risks will remain in Cabo Delgado, although oil and gas projects are unlikely to be directly targeted.

Security Environment

Mozambique faces an emergent threat from militant Islamists, with risks concentrated in the northern Cabo Delgado province. At least 20 attacks were recorded between October 2017 and December 2018, resulting in at least 57 non-militant deaths. 

However, local reports suggest that as many as 280 people have been killed. Attacks have primarily targeted security forces or the local populace, and have been low capability in nature, using bladed weapons and firearms. Onshore oil and gas assets with adequate security measures are unlikely to be directly affected, although Western commercial assets will remain aspirational targets.

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). 

In October 2018, Mozambique held peaceful elections, the first such elections that Renamo had participated in for 10 years. While Renamo accused the governing Frelimo party of falsifying results and suspended peace talks, the group has not broken the ceasefire. Renamo now lacks the military capacity to engage in fighting with the government, having around 1,000 fighters and limited arms. 

The success of October's elections also paves the way for a final peace deal to be reached before a general election in October 2019. Renamo is likely to continue threatening to withdraw from talks in order to extract concessions, particularly on power devolution, but a return to full conflict is unlikely.

Trading Environment

Mozambique's economic growth will accelerate in 2019, reaching a forecasted 3.9%, up from 3.5% in 2018. Private consumption will be a driver of real GDP growth, as inflation moderates to an estimated average of 7.5% in 2019. 

However, limited credit availability will weigh on private demand and investment. As external financial support dried up following 2016's debt scandal, government borrowing from domestic banks has crowded out the private sector and households. Despite monetary easing, any material improvements to credit availability will be slow to materialise, ensuring that real GDP growth remains below the 7.3% annual average rate seen between 2006 and 2015.

Since 2016, Mozambique has struggled with a debt crisis, as the revelation of an additional USD 1.4 billion in undisclosed debt, triggered a default on sovereign debt. In November 2018, Mozambique reached an agreement with the majority of its creditors to restructure the 2023 Eurobond. 

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The deal, which is yet to receive parliamentary approval, would see Mozambique issue a new USD 900 million Eurobond, maturing in 2033. Bondholders will also receive 5% of annual fiscal revenues from future gas production from two offshore gas projects.

Despite this deal, sovereign credit risks will remain elevated in the near-term as little progress has been made on restructuring a USD 535 million state-backed loan to Mozambique Asset Management or a USD 622 million facility with ProIndicus. 

This will prevent the International Monetary Fund (IMF) and other donors from renewing financial support, ensuring that the budget deficit remains elevated at 6.7% of GDP in 2019. In the longer term outlook, LNG production, which is forecasted to begin in 2022, could provide significant support to the debt position. 

Government debt is expected to fall from 102.1% of GDP in 2017 to an average of 58% between 2023 and 2027.

Investment Environment

Fixed investment in Mozambique is expected to rise in 2019. The construction  industry is forecasted to grow in value by 7%, marking a recovery from the 12.4% contraction seen in 2017. Most of this investment will target Mozambique's coal sector and LNG industry, with projects in the near term targeting export facilities. 

These sectors are dominated by foreign firms, who are not subject to the same financial pressures as domestic firms. In December 2018, the Mozambican Federation of Contractors indicated that 90% of the country's construction firms were in bankruptcy proceedings, as the government has been unable to pay contractors. 

Eni, Mota Engil, DP World and China Machinery Engineering Corporation are all participating in projects in Mozambique, such as the Maputo Port Docks Modernisation, Eni Offshore LNG Terminal and the Chitima-Macuse Railway project.


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In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for DR Congo, China, Ecuador and Tanzania, all of which have been the subject of recent enquiries from JLT's client base.

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