• Mozambique is rated CCC, indicating possibility of default
  • Debt profile deteriorated sharply on hidden loans disclosure

Fitch Ratings Ltd. downgraded Mozambique’s credit grade to CCC from B after the southern African nation revealed that it had kept more than $1 billion of debt hidden from investors.

The new rating indicates that default is a real possibility and comes just weeks after both S&P Global Ratings and Moody’s Investors Service lowered Mozambique’s ratings when the government swapped $697 million of bonds held by a state-owned company with $727 million of new sovereign debt.

“Mozambique’s public debt profile has deteriorated sharply following the disclosure of additional state-guaranteed debt, which had previously been excluded from official statistics,” Fitch said in an e-mailed statement on Friday. While details of the loans haven’t yet been fully disclosed “it is certain that their commercial nature will lead to a worsening of the country’s debt-servicing schedule and sustainability.”

The ratings company estimated that when factoring in the newly revealed loans Mozambique’s government debt was equal to 83 percent of gross domestic product in 2015. The currency declined 32 percent last year and a further weakening could push public debt to 100 percent of GDP this year, Fitch said on Friday.

Cash Crunch

Mozambique restructured its debt without making investors aware of $622 million and $500 millions in loans extended to two state-owned companies.

In response to the revelation of the undisclosed debt, the World Bank will withhold $40 million in direct budget support this year, the Wall Street Journal reported Friday, without identifying the source. The International Monetary Fund will also freeze $155 million of a $286 million emergency loan, according to the Financial Times. European donors may also refuse to disburse $305 million in budget support, Anne Fruhauf, a senior vice president at Teneo Intelligence, said.

Mozambique is facing a cash crunch as prices of commodities such as coal drop. The metical’s weakness has also undermined the government’s ability to pay back debt, about 88 percent of which is denominated in foreign currencies, Fitch estimates.

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