Fitch Cuts Mozambique Rating to CC Over Hidden Public Debt

  • Secret loans obligations could cause near-term credit event
  • Company could downgrade rating to Restricted Default in future

Fitch Ratings cut Mozambique’s credit to CC, indicating that a default of some kind is probable, after the southern African nation last month disclosed more than $1 billion of previously hidden debt.

The grade was cut by one notch from CCC, according to a statement e-mailed by the company Monday. The review was brought forward by five months because of a “material change in the creditworthiness of the issuer,” it said.

“The disclosure of hidden public debt has revealed significant short-term repayment obligations, which could precipitate a near-term credit event,” Fitch said.

Mozambique’s government in April admitted to the existence of $1.4 billion of undisclosed loans to the Interior Ministry and state-owned security companies Proindicus and Mozambique Asset Management, or MAM. While Proindicus made a $24 million interest payment on its $622 million facility on March 21, Finance Minister Adriano Afonso Maleiane said last week MAM won’t be able to honor its $178-million interest payment due May 23.

“If this proves to be the case, we can expect more downgrade announcements by all three international rating agencies,” Hanns Spangenberg, a senior economist at NKC African Economics, based in Paarl, South Africa, said in an e-mailed note.

The authorities have acknowledged that the debt owned by the companies is guaranteed by the government, Fitch said.

MAM, whose $535 million loan is one of those the government hid from creditors, is negotiating with lenders to restructure the debt, Maleiane said.

‘Credit Event’

“Even if the authorities are able to make scheduled repayments of the sovereign-guaranteed debt of state-owned companies in the near term, the potential restructuring of the MAM debt being considered by the government could precipitate a credit event,” Fitch said. “In that event, if we judged a restructuring to constitute a distressed debt exchange, we would downgrade the Mozambique sovereign rating to Restricted Default.”

Since the discovery of the undeclared loans by the International Monetary Fund, European nations and multilateral lenders have withheld funding, while other rating companies have also downgraded Mozambique’s credit. Its currency has fallen 14 percent against the dollar this year, after depreciating 28 percent in 2015.

The yields on Mozambique’s $726 million of bonds due January 2023 rose six basis points to 16.295 percent on Monday. They closed at a record high of 17.12 percent on May 19, according to data compiled by Bloomberg.

Mozambique’s annual public debt servicing costs are estimated to have almost doubled to about 4.5 percent of gross domestic product because of the hidden loans, according to Fitch.

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