Opinion 

Author: Paulo Matavela (Independent Financial Consultant)

Introduction 

Standard Poors (S&P) is an international credit rating agency, which generally assesses the ability of a country, company or financial institution to meet its debt repayment obligations. In the most recent publication, dated October 18, 2024, S&P downgraded Mozambique's long-term local currency rating from CCC+ to CCC.

What does this mean?

This rating shows that Mozambique is more likely to default on its debt to its local creditors, so the country loses the confidence of foreign investors and the cost of raising funds increases given the high risk of creditors. In other words, the country reduces its ability to honor its financial commitments or debt repayment obligations.

Causes of "downgrade Mozambique's downgrade

The main causes behind this recent classification of Mozambique have to do with:

• The fiscal pressure that the country has been suffering due to the reforms introduced in the civil service payroll - TSU, currently the salaries and wages of the civil service represent around 15% over GDP;
• Unsustainable domestic public debt, with an increase of 90 billion meticais from December 2023 to the present, currently standing at 403 billion meticais;
• With the government unable to generate enough revenue to cover its expenses, the country continues to show a budget deficit of 8% over GDP;
• Constant delays in domestic debt payments, resulting in interest on arrears;
• The economy is fragile and dependent on natural gas and oil projects, making it vulnerable to any fluctuation in the price of commodities on the international market;
• With predictions of heavy rains between October 2024 and March 2025, Mozambique is on the list of the 10 African countries most affected by natural disasters in recent times;
• Lack of transparency in fiscal management, investment is needed in institutional governance indicators; and
• High pre-election campaign costs, estimated at around 260 million meticais.

Economic impacts

• Reduction in the level of Foreign Direct Investment in the country, impacting economic growth and employment levels;
• Difficulty in the government's access to credit, limiting its ability to invest in infrastructure, health and education, among other critical sectors;
• Possible delays in natural gas and oil projects, negatively impacting the country's economic growth projections; and
• Possibility of exchange rate pressure, considering the low level of foreign investment and the inflow of foreign capital into the country.

Potential solutions

• The informal sector in Mozambique contributes 40% to the overall GDP, formalizing the informal sector can guarantee sustainable levels of tax revenue and adequate working conditions;
• Revenues from the Sovereign Wealth Fund, considering the Sovereign Wealth Fund's fiscal management rule presented, in which part of the revenues from natural gas and oil will be allocated to the state budget to cover priority projects in the areas of health, infrastructure, transport and education;
• Maximize revenues from natural gas projects, considering that by 2025, production and export capacity is expected to reach 100%;
• Reduction of short-term debt issues, in this case Treasury Bills, giving precedence to treasury bonds which can allow for better debt refinancing;
• Cutting the allowances and perks of state leaders, thus showing a sacrifice to be made by all Mozambicans, regardless of their level;
• Governance and transparency reforms to enable better public management of state revenues and to strengthen the fight against corruption and fiscal transparency through concrete actions.

Finally, one of the negative effects of the current political crisis in Mozambique on the economy will be greater fiscal pressure from the state, generating pressure on domestic debt and severely increasing the likelihood of defaulting on local currency debt.