Mozambique's short-term sovereign risk rating is moved to 20 (or A on the generic scale). The outlook remains unchanged at Stable.
IHS perspective | |
Significance | Current-account pressures in the Mozambican economy are not expected to ease during 2016. |
Implications | More fiscal and monetary responses will be required to shield the current account against the fragile international commodity price backdrop. A move towards an IMF support programme is rating supportive. |
Outlook | Mozambique's medium-term sovereign risk profile remains favourable. However, this outlook hinges on the successful development of vast amounts of offshore natural gas resources in the northern part of the country. |
Risk ratings | IHS has downgraded Mozambique's short-term sovereign risk rating to 20 (equivalent to A, or Good Quality, on the generic scale). The outlook is left unchanged at Stable. |
IHS has downgraded Mozambique's short-term sovereign risk rating to 20 (equivalent to A on the generic scale or Good Quality), with the outlook remaining unchanged at Stable. The recent fall in international commodity prices combined with slow policy response to the metical's exchange rate weakness bode negative for Mozambique's current-account outlook in the near term. However, the resumption of balance-of-payments assistance under an International Monetary Fund (IMF) policy support programme proves positive for Mozambique's short- and medium term sovereign risk ratings.
Current account to remain under pressure
Current-account pressures in Mozambique have increased during 2015 and it appears unlikely that conditions will improve in the near term.
Preliminary indicators released by the Bank of Mozambique show that Mozambique's current-account deficit widened to USD5.2 billion in the first three quarter of 2015 from USD4.8 billion for the same period a year before. The trade deficit remained broadly unchanged at USD3.5 billion for the respective periods as both imports and exports of goods slowed. Imports of goods contracted by 2.7% year on year (y/y) in the first nine months of 2015, while exports of goods slowed by 4.2% y/y. The service balance showed some improvement, while net transfers fell back.
With international commodity prices for key mineral exporting commodities such as coal and natural gas unlikely to show a sharp rebound during 2016, IHS is of the view that Mozambique's current account will remain under pressure. Traditional exports such as cotton and sugar show a different price profile, with sugar prices performing stronger in the past year. A slow policy response to the current account pressures though inadequately disciplined fiscal and monetary policies during 2015 add to the short-term sovereign risk concerns. The Bank of Mozambique retracted from its unchanged policy stance towards the end of 2015 and hiked the policy rate by a cumulative 225 basis points. More policy tightening could be required to address the mounting prices and current account pressures in the economy during 2016, due to the 25% depreciation of the metical against the US dollar witnessed last year and the country's high reliance on investment-and-consumer-goods-related imports.
Simultaneously, foreign direct investment (FDI) inflows have started to taper down in recent months, while an ongoing drop in donor aid support to the Mozambican economy add to capital flow pressures. The widening current account deficit and lacklustre capital flows placed some pressure on Mozambique's overall import cover ratio, which is expected to drop below 3 months of imports of goods and services during 2016. However, adjusting the import cover ratio by excluding FDI-related imports - which is notoriously financed through FDI inflows – and foreign reserve holdings, Mozambique's import cover ratio improves significantly to more than 4 months of imports of goods and services, lending some support to the country's short-term sovereign risk rating.
The recent decision by the Mozambican authorities to move to a staff monitored program linked to macro-economic targets and balance-of-payments assistance underlines the unchanged medium-term sovereign risk outlook for Mozambique.
Outlook and implications
Mozambique is expected to be one of the fastest-growing economies within the sub-Saharan African region in the medium term. This outlook hinges on the successful development of vast amounts of offshore natural gas resources in the northern part of the country. However, the final investment decisions continue to be delayed over slow policy responses by Mozambican authorities, of which the relocation of households away from the planned liquefied natural plant site onshore is the most pertinent at the moment. Low international natural gas prices and rising international supply during 2016 add to investor woes.
Strong growth will strengthen Mozambique's debt-servicing capabilities moving forward but delays in natural gas development projects could in future be hazardous for the county's medium-term sovereign risk rating.