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Fitch Affirms Mozambique at 'B+'; Outlook Stable
May 16, 2014 / 4:07 AM / 3 years ago

Fitch Affirms Mozambique at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 16 (Fitch) Fitch Ratings has affirmed Mozambique's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. Fitch has also affirmed the Country Ceiling at 'B+' and Short-term IDR at 'B'. KEY RATING DRIVERS The affirmation reflects the following key rating drivers: Growth has averaged 7%, well in excess of the 'B' median of 4.2% over the past five years. It has benefited from the development of Mozambique's significant mineral resources, infrastructure investment following the country's three-decade long civil war as well as a favourable macroeconomic policy environment. Inflationary pressures have abated, supported by a strengthening currency and improved monetary policy. Developing coal and natural gas reserves will continue to underpin robust growth, which is forecast to average 8% over the next three years, due to estimated foreign investment of USD5bn (or 30% of GDP) annually. Despite significant potential, risks emanate from delays in infrastructure investment, falling commodity prices and an intensification of political violence. Mozambique has announced sharply higher budget deficits each year over the past four years, rising to 9% in 2013 and 12.8% in 2014 from 5.2% in 2011, raising concerns about the country's commitment to prudent fiscal policy - a factor which contributed towards Fitch's upgrade of Mozambique in 2013. However, outturns on average have been 3% of GDP lower than announced, due to challenges executing capital projects, lower than budgeted donor inflows as well as windfall capital gains taxes from the gas sector. Windfall capital gains (4.2% of GDP) as well as under spending on capital projects (3.4% of GDP), sharply reduced the budget deficit in 2013. Provisional data show a budget deficit of 3.4% of GDP in 2013, against 9% announced in September 2013's supplementary budget. The 2014 budget shows the deficit jumping to 12.8% of GDP. However, due to unbudgeted windfall capital gains as well as under spending on infrastructure, Fitch forecasts a lower deficit of 7.7% of GDP, albeit still a significant increase from an average 4% of GDP deficit recorded over the past four years. Fitch expects government debt as a percentage of GDP to rise to 47.7% of GDP in 2015 from 42.5% in 2012, above the 'B' median of 41.8% of GDP, and depending on the execution of public infrastructure investment. Despite comparatively high debt levels, interest payments as a percentage of government revenue remain low at 2.8%, compared with a 'B' median of 7.8%, due to the highly concessional nature of Mozambique's debt structure. Government deposits have risen sharply to 17.7% of GDP. Consequently, net debt is below peers at 25.6% of GDP. ENATUM, a state-owned fishing company formed six weeks prior to issuing USD850m on international capital markets, has highlighted existing concerns about corruption, transparency and fiscal responsibility, with donors delaying budget support in response. The bond was purportedly issued to finance investments in tuna fishing, but a large share of the funds will go to fund maritime security. The military wing of Renamo, an opposition party, will continue sporadic attacks on strategic assets ahead of the elections in late 2014, to win inclusion into the military and police force as well as changes to electoral law. A return to full scale civil war is unlikely; but the attacks may adversely impact Mozambique's ability to attract foreign investment. Low per capita income and human development indicators remain a major constraint on the rating, falling below the 'B' median. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, the main factors that individually, or collectively, could trigger positive rating action include - Greater materialisation of the benefits of natural resource endowments on government revenue and exports. This will require adequate investment in infrastructure to support the development of coal and natural gas. -A continued track record of economic management supportive of strong and stable economic growth and an improvement in per capita income. - Further regulatory reforms and more effective implementation reflected in improvements in the business environment. The main factors that individually, or collectively, could trigger negative rating action include - A severe and sustained fall in commodity prices that materially erodes external debt sustainability and places the development of the coal and LNG sectors in jeopardy. - A significant weakening in public finances due to rapid increases in current expenditure, leading to large deficits and a sustained increase in debt. - An escalation in violence that undermines the business environment and has a detrimental impact on exports and investment. KEY ASSUMPTIONS The rating and Outlook are sensitive to a number of assumptions: - Infrastructure development will continue to facilitate the expansion of the coal sector and the development of natural gas. - There is no return to civil war. Contact: Primary Analyst Carmen Altenkirch Director +44 20 3530 1151 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Cesar Arias Associate Director +1 212 908 0385 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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