S&P Sees Mozambique Unrest Pushing Nation Closer to Debt Default
Deadly protests that have rocked Mozambique’s economy since disputed elections last month are ratcheting up already high risks that the government will be unable to service its domestic debt, according to S&P Global Ratings.
The company cut its assessment of the gas-rich nation’s local currency debt to CCC on Oct. 18, before widespread demonstrations shut down large parts of the economy. The turmoil will squeeze the government’s already tight finances, S&P analyst Leon Bezuidenhout said.
“Unless there’s some type of sharp fiscal adjustment or windfall revenue, they may have to undertake some type of either distressed restructuring or continued further delayed payments on domestic debt,” he said in a virtual interview this week.
Mozambique has been wracked by upheaval since opposition presidential candidate Venâncio Mondlane last month called for a nationwide shutdown over what he’s called fraudulent election results that placed him second. The authorities tactics of dispersing demonstrators with teargas and live ammunition have triggered violent responses, including the torching of police stations and attacks on the main border crossing with South Africa that forced its temporary closure.
At least 40 people have died during the protests, according to the Center for Democracy and Human Rights, a campaign group based in Maputo, the capital.
Mondlane’s call this week to paralyze major trade routes in the country adds to the economic pressure. State finances are already under strain because the government repeatedly spent more than budgeted on civil-servant salaries and faces rising costs of fighting an insurgency in Cabo Delgado province, where violence has held back an anticipated windfall from natural gas projects.
Economic Losses
The southeast African nation’s biggest business association on Nov. 12 estimated economic losses from the election dispute at almost $390 million, or 2.2% of gross domestic product. There are growing risks of further delays to a $20 billion liquefied natural gas project that TotalEnergies SE is leading.
Effectively shut out of international debt markets since 2016, the government has heavily relied on selling domestic bonds to finance its deficit, which S&P sees averaging 4.3% from this year through 2027. It’s also increasingly tapped the central bank for financing.
Mozambique’s local currency debt has more than doubled since 2020 — the year after it completed a eurobond restructuring. Last month, the government carried out a liability-management exercise, offering lenders a new bond with longer maturities.
“It cannot be overstated how significant the liquidity challenges are,” Bezuidenhout said. “This is slowly but surely turning into a solvency issue because the maturities for next year and the year thereafter are large.”
He also sees Mozambique’s metical as overvalued by as much as 40%, with the real effective exchange rate near the highest since 2015.
‘Stabilized Arrangement’
The level at which the currency trades has barely changed since Sept. 2021 — what the International Monetary Fund labels a “de facto stabilized arrangement.” There was a foreign-exchange demand backlog of about $440 million in October, with a wait time of about three months, according to the fund.
Still, there are indications that “the current exchange rate is not very far away from its fundamental equilibrium value,” the Washington-based lender said in a Nov. 8 report.
The post-election turmoil shows no signs of abating and any currency devaluation would fan inflation and risk further instability.
Police chief Bernardino Rafael on Nov. 12 warned of zero tolerance for the demonstrations, which he referred to as “urban terrorism.” Mondlane has urged protesters to remain peaceful.
President Filipe Nyusi on Wednesday convened an extraordinary meeting of his National Defense and Security Council. The body struck a more conciliatory tone toward the protests, calling on the defense and security forces to prioritize dialog, according to a statement.
