November 29, 2013 / 4:36 PM / 4 years ago

Fitch Affirms Mozambique at 'B+'; Stable Outlook

LONDON, November 29 (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 fact that the authorities have demonstrated a track record of prudent economic policy and reform, notably in the conduct of monetary policy, revenue collection and public financial management. This is reflected in above-peer growth, for the past 15 years. Fitch forecasts that the economy will expand by 7% in 2013 and 8.3% in 2014, driven by strong growth in the mining sector and financial services as well as communication and transport. Mozambique has significant mineral resources which will support growth, the budget and external finances over the medium term. Coal reserves are estimated at 20 billion tonnes, second only on the continent to South Africa, and the sector has attracted foreign direct investment (FDI) of around USD5bn (30% of GDP) since 2008. Recoverable gas resources are estimated at over 100 trillion cubic feet and the country looks set to become a major gas producer based on substantial FDI-financed exploration. The government has introduced a five-year strategic plan to improve the business environment after Mozambique fell seven places in the World Bank's Doing Business Survey in 2012/13. Over the past year, the authorities have introduced a new competition law, a draft bill to regulate credit registry bureaus as well as a decree to speed up the time required to register a business. The 2014 Doing Business Survey showed a slight improvement to 139th from 142nd of 189 countries, due to an improvement in dealing with construction permits. The 2014 budget shows the deficit widening to 11% of GDP, from an estimated 9% in 2013. However, this assumes that the government has the capacity to ramp up infrastructure investment to 17% of GDP compared with the 12% achieved in 2012. Fitch expects a budget deficit of 6% of GDP in 2014, similar to that which it forecasts for 2013. Disciplined fiscal policies have led to a persistent decline in government indebtedness, even after Mozambique received debt relief. Government debt has fallen to a projected 42% of GDP in 2013 from 54% in 2006. Fitch expects government debt as a percentage of GDP to rise modestly to 44% of GDP in 2015, although much depends on the government's capacity to increase capital expenditure in line with its projections. Ematum, a state-backed fishing company, issued a government-guaranteed USD850m (or 5.3% of GDP) Eurobond in September 2013, to purchase fishing and patrol boats. With USD300m of the funds used to purchase the boats, it is unclear what the remainder will be spent on. The development of the liquefied natural gas (LNG) sector will continue to place pressure on the current account deficit. Fitch forecasts the deficit to average around 45% of GDP in 2014 and 2015, as the import-heavy development phase takes off. Fitch does not expect this to pose a threat to macroeconomic stability, with rising imports funded through increased FDI and private debt. As a result, Fitch expects the impact on the overall balance of payments to be modest, with reserves still expected to rise slightly. Clashes between the ruling party, Frelimo, and long-standing opponents Renamo, have increased speculation about a return to civil war. Fitch does not believe this is likely, given the opposition's limited capacity to re-launch large-scale attacks. However, a continuation of small-scale attacks, sufficient to unnerve foreign investors and delay investment, remains a risk, particularly around the municipal elections in November and in the run up to the presidential elections in 2014. Low per capita income and human development indicators, which are well below the 'B' median, remain a major constraint on the rating. RATING SENSITIVITIES 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 as 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 erode external debt sustainability and place the development of the coal and LNG sectors in jeopardy. - A sustained 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 - 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 Richard Fox Senior Director +44 20 3530 1444 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 9 August 2013 are available at www.fitchratings.com. Applicable Criteria andALL 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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