Moody's assigns B1 sovereign rating to Mozambique, outlook stable

By bne IntelliNews September 23, 2013

Moody's Investors Service has assigned B1 local and foreign-currency issuer ratings to the government of Mozambique, saying that the country has small and undiversified economy with very low GDP, but has also favourable growth prospects given its significant gas and coal resources. The global ratings agency noted that Mozambique's GDP per capita at USD 1,169 as of 2012 is among the lowest among the sovereigns it rates, while the economy remains undiversified, with subsistence agriculture accounting for the bulk of employment. It added, however, that the country’s prospects are very good, recalling the IMF's forecast of 8% real annual GDP growth for the coming years, which depends on the projects in the natural resource sectors developing according to plans.

In addition to the vast coal deposits, which contributed 2.4% of nominal GDP in 2012 and are likely to represent 4% of GDP in 2014 and 6.5% by 2017, according to the IMF, the recent discovery of large natural gas reserves in the Rovuma Basin has the potential to transform the country. The construction of the world’s second-largest LNG extraction site is planned to start next year and to be completed by 2020. Moody's warns that infrastructure bottlenecks could hamper the full development of the country's natural resource sectors.

Moody’s noted that Mozambique has low fiscal strength, characterised by relatively high budget deficits and public debt given the significant infrastructure investment needs, and an expected decline in external donor support over the coming years. The agency highlighted also the country’s low institutional strength with weak governance indicators, which is partly offset by a track record of political stability and prudent monetary policy. Moreover, Moody’s drew attention to Mozambique’s large current account deficits, which amounted to 36% of GDP last year, but noted that a large share of the deficit is covered by inflows of foreign direct investment into the natural resources sectors. FDI flows to Mozambique nearly doubled last year to USD 5.2bn, compared to a 5% growth in Africa as a whole to USD 50bn, according to data by the UN. Political risks are also a consideration, mainly in terms of the future distribution of the natural resource wealth.

Moody's assigned a stable outlook to Mozambique’s ratings, saying that it could upgrade it if economic growth continues to be strong and if the government develops a track record of smooth management of the resource boom. A potential downgrade could come if public debt grows faster and donor support falls more rapidly than expected.

Mozambique is rated B+ by both Standard and Poor's and Fitch.

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