Fitch maintains Mozambique’s rating in CC and expects agreement with IMF

“ A mozambique’s ‘CC’ classification reflects Fitch’s view that some form of non-compliance seems likely within the time horizon of the analysis,” wrote the agency in the note accompanying the Friday decision to keep the country at the second worst level of its sovereign risk scale.

In April, Fitch lowered the level of financial credibility of the country from CCC to CC, the second worst.

Now, Fitch justifies the maintenance of this classification with the likelihood of restructuring the only Mozambican sovereign obligation ‘eurobond’, taking into account the IMF’s previous assessment that Mozambican public debt remains unsustainable in the current economic policy trajectory.

“ In view of the IMF’s assessment that Mozambique’s public debt is unsustainable in the current political trajectory and the commitment shown by the authorities to secure a new IMF programme, we consider it likely that a restructuring of the single Eurobond will be part of any debt sustainability restoration process,” the agency said.

Analysts add that any material change in commercial debt conditions, including an extension of maturity, would be considered a ‘distressed debt exchange’ operation.

On negotiations for a new financial programme with the IMF, Fitch admits an agreement until the beginning of 2027, but alerts to significant risks of implementation.

“Fitch expects an agreement with the IMF at the beginning of 2027, but considers the risks of implementation significant, given the likely size of the required fiscal adjustment and the social and political sensitivity of wage mass reforms and exchange rate flexibility measures,” reads in the analysis, about negotiations over a year ago between the Government of Mozambique and the Fund.

The agency also warns of an increase in the risk of default if the country fails to ensure a new understanding: “If Mozambique cannot guarantee a new IMF programme or fails to meet its conditions, we see an increased risk of a non-compliance event.”.

Fitch considers that the country continues to face severe financing constraints, providing that the government will depend throughout this year on internal debt exchange operations and the use of central bank credit.

“ Domestic commercial banks do not show appetite for new net credit to the sovereign ", stresses the agency.

Among the pressure factors pointed out by Fitch is the advance repayment of USD 701 million (EUR 608 million) to the IMF carried out in March this year through the central bank, an operation that the agency interprets as almost monetary financing to the State.

Fitch also expects the budget deficit to rise to 2.9% of gross domestic product (GDP) in 2026 in a context of continued accumulation of late domestic and external payments.

According to the agency, the budgetary margin remains extremely limited because the wage and interest charges absorb about two thirds of public expenditure, reducing investment space.

In this context, it estimates that public investment falls to 4.1% of GDP this year, compared with 4.7% previously.

The agency adds that the capacity to increase tax revenue is reduced, since Mozambique already has one of the highest tax revenue rates in the region relative to the size of the economy.

Fitch considers, however, that economic activity should benefit from the advancement of large natural gas projects in the Rovuma basin, although it maintains reservations about the country’s ability to overcome the current financial constraints in the short term.