Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Republic of Mozambique Joint Bank-Fund Debt Sustainability Analysis

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Mozambique’s debt remains in distress, which is unchanged from the previous DSA published in June 2019. Considering that, to a large extent, future borrowing and government guarantees reflect state participation in the sizable liquified natural gas (LNG) development, debt is deemed sustainable in a forward-looking sense. Participation in the recently announced G20 initiative would provide debt service relief in the near term, thus flattening the projected sharp deterioration in debt liquidity indicators due to the COVID-19 pandemic. The possibility of an extension of the G20 initiative into 2021 would be a further mitigating factor for the debt sustainability assessment. The present value (PV) of external public and publicly guaranteed (PPG) debt relative to GDP is projected to remain above the prudent threshold with a gradual declining path dropping below the threshold by 2028.The PV of PPG external debt relative to exports would drop below the prudent threshold in 2024. The ratio of external public debt service to fiscal revenues would drop below the prudent threshold temporarily in 2020 but would breach again the threshold until 2030. The debt service-to-exports ratio would remain around the prudent threshold until 2023, when it drops and remains below the threshold for the rest of the projection period.

Public Debt Coverage

1. Compared to the last DSA,2 the coverage of public and publicly guaranteed debt remainsunchanged (Text Table 1). The scope of Mozambique’s public debt covers data on external and domestic obligations of the central and local governments. The authorities also provided debt data on state-owned enterprises (SOEs) and SOE debt guarantees. 3 The debt covered by the DSA excludes Hidroeléctrica de Cahora Bassa (HCB).4 Domestic debt is denominated in local currency and, for the purposes of the analysis, domestic debt is assessed by currency and not by residence as data capturing the residency of creditors are unavailable.

Text Table 1.

Mozambique: Public Debt Coverage Under the Baseline Scenario

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Background

A. Recent Economic and Debt Developments

2. Before the COVID-19 pandemic, the Mozambican economy was recovering from Tropical Cyclones (TCs) Idai and Kenneth which struck in 2019. GDP growth decelerated to 2.2 percent in 2019 driven by the adverse supply shock of the TCs and a contraction in the extractive industry. However, despite the supply shock, inflation declined to 3.1 percent (y/y) in March, from 3.5 percent (y/y) in December 2018, due to subdued aggregate demand, well anchored inflation expectations, and a broadly stable exchange rate. The current account deficit improved to 20.8 percent of GDP in 2019, from 30.9 percent of GDP in 2018, mainly due to: (1) a much lower-than-expected megaproject imports of services; and (2) a large payment (US$880 million) of one-off capital gains taxes related to the sale to Total of Occidental’s LNG operations in the country. This payment was only partially offset by lower coal exports (mine flooding and lower export prices) and higher emergency relief imports. The (underlying) overall fiscal deficit, after grants and excluding one-off capital gains taxes, was contained at about 5½ percent of GDP in 2019, from about 6 percent of GDP in 2018, as lower (underlying) revenue collections were more than offset by lower public spending.

3. Compared with the previous DSA, the debt stocks used are updated from 2017 to 2018. This DSA also accounts for Mozambique’s recent GDP rebasing which has led to downward revisions to the historical (until 2017) debt-to-GDP indicators (Text Table 2).

Text Table 2.

Mozambique: Debt, Public and Publicly Guaranteed

(Percent of GDP)

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4. The authorities’ legal and debt restructuring strategy is being implemented. It reached an important milestone in October 2019 with the Eurobond swap that has lowered interest payments and extended maturities broadly in line with the baseline scenario in the last DSA. While the authorities were conducting due diligence on whether corruption may have been involved in contracting the VTB loan to MAM, that bank filed in December 2019 a civil lawsuit in the U.K. against Mozambique, arguing that the government guarantee remained valid. Recently, the authorities have informed staff that in their defense against the VTB lawsuit, the government has disputed the validity of the government guarantee on the VTB loan—which was deemed illegal by Mozambique’s Assembly of the Republic—and does not intend to support MAM.

5. Mozambique continues to accumulate external debt service arrears on the defaulted loans. The overall stock of external arrears on public and publicly guaranteed external debt service is estimated to have reached US$1,375 million (9.3 percent of GDP) at end-2019 (Text Table 3).

Text Table 3.

Mozambique: Evolution of the Stock of External Arrears

(Millions of U.S. dollars)1

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Staff estimates based on information received by the authorities on their debt strategy. Contractual penalty fees or rates have not been included.

Data reported by the authorities for Libya, Iraq, Angola, Poland and Bulgaria on the reconciled debt.

B. Macroeconomic Forecasts

6. While the COVID-19 pandemic is expected to hit Mozambique hard and the macroeconomic assumptions underlying the baseline scenario, particularly for the next two years, have worsen relative to the last DSA, the medium-term outlook remains positive due to the LNG megaprojects (Text Table 4). GDP growth projections for 2020 and 2021 have been revised to 2.2 percent and 4.7 percent, respectively, owing to COVID-19 related disruptions within the economy and much worse external environment. Risks to growth in 2020 are on the downside, as the impact of the COVID-19 pandemic could be more pronounced and significant delays could happen in the Area 1 LNG project. The overall fiscal deficit is expected to increase significantly in 2020 owing to lower revenues—resulting from lower activity and fiscal measures to support the private sector—and higher spending on health and social transfers to the poorest segments in society. From 2021 onward, the overall fiscal deficit is expected to improve as the authorities implement gradual fiscal consolidation, with the objective to largely eliminate the primary fiscal deficit after grants by 2022. The current account deficit is expected to increase until 2022, reflecting a surge in imports of goods and services mainly related to the construction of processing facilities for the LNG megaprojects. Approximately one-third of all imports related to such projects will be financed by (frontloaded) FDI, with the remainder financed by Export Credit Agencies (ECAs) and private banks. With the start of LNG production in 2023, real GDP growth will pick up significantly and fiscal and external indicators will start improving dramatically.

Text Table 4.

Mozambique: Evolution of Selected Macroeconomic Indicators Between DSA Updates

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Sources: Mozambican authorities; and IMF staff estimates and projections.

7. The severe impact of the COVID-19 pandemic has created additional financial needs. The authorities are seeking US$700 million from the international community to fight the adverse economic effects of the COVID-19 pandemic. An RCF disbursement is expected to close about 45 percent of the external and fiscal financing gaps whereas the rest is expected to come from other development partners of Mozambique, including US$170 million from the World Bank and US$54 million from the EU.

8. The baseline assumes a standstill on all interest and principal payments, as well as arrears due in 2020 to G20 official bilateral creditors. This is in line with the G20 initiative to help poor countries channel resources reserved for debt service payments to policy responses to the COVID-19 pandemic. It considers rescheduling debt service payments due from May 1 to end-2020 to G20 official lenders at the existing interest rates in the loans with one-year grace period and a repayment over the next three years.

9. Considering the recent communication to staff that the government does not intend to support MAM, which will follow the normal course of commercial bankruptcy without backing, the VTB loan to MAM has been removed from the DSA baseline. Further, given the authorities’ representation to staff that the validity of the government guarantee on that loan is in dispute, the guarantee has also been removed from the DSA baseline as of 2020 and is instead treated as a contingent liability in accordance to IMF policy. Together with the government guarantee on the loan contracted by Proindicus, which is in dispute as well, the contingent liability from SOE’s debt now amounts to 7.6 percent of GDP (Text Table 5).

Text Table 5.

Mozambique: Calibration of the contingent liability stress test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

10. With regards to the LNG sector, relative to the last DSA, the baseline scenario assumes a delay of the ExxonMobil-led LNG megaproject by two years. ExxonMobil and its partners have yet to reach a final investment decision (FID) on this project. Under the challenging global environment of lower energy prices and tighter financing conditions, it is plausible to assume that ExxonMobil and its partners will delay the FID to 2021 and start LNG production only in 2026. The LNG megaprojects led by Total and ENI, however, are assumed to move ahead as scheduled because their FIDs have already been reached, contracts to deliver LNG have been signed and financial penalties for non-delivery are substantial.

11. Risks are tilted to the downside, although larger than expected LNG production and revenues constitute an important upside risk. The main risks include (i) a more pronounced than envisaged COVID-19 pandemic in Mozambique, (ii) delays in the implementation of the LNG megaprojects that have already reached their FID, and (iii) delayed normalization of the global economy and protracted trade disruptions. Previously identified risks remain, including (i) a deterioration in the security situation in the North, (ii) backtracking of peace negotiations with the main opposition party, Renamo, and (iii) extreme climate events.

12. According to the debt sustainability framework’s realism tools, the baseline projections are reasonable (Figures 3 and 4). The growth projections are relatively lower than suggested by the alternative fiscal-growth multiplier analysis due to the adverse growth effects related to COVID-19. The baseline fiscal adjustment in the primary balance seems credible as it does not fall in the upper quartile of the distribution of past adjustments of LICs. The contribution of public investment to growth seems reasonable in comparison to historical contributions and the gradual economic recovery following the 2016 economic downturn.

Figure 1.
Figure 1.

Mozambique: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 141; 10.5089/9781513542515.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Mozambique: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 141; 10.5089/9781513542515.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Mozambique: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 141; 10.5089/9781513542515.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Mozambique: Realism Tools

Citation: IMF Staff Country Reports 2020, 141; 10.5089/9781513542515.002.A002

Country Classification

13. Mozambique’s debt carrying capacity is assessed as weak, unchanged from the last DSA. Mozambique’s Composite Indicator score is 2.60, indicating that the country’s debt-carrying capacity is weak. The reason for the weak debt carrying capacity assessment is the huge scale of LNG megaprojects under development (these projects amount to over three times Mozambique’s GDP) and their related imports.5 Accordingly, the relevant indicative thresholds for the weak category are 30 percent for the PV of debt-to-GDP ratio, 140 percent for the PV of debt-to-exports ratio, 10 percent for the debt service-to-exports ratio, and 14 percent for the debt service-to-revenue ratio. These thresholds are applicable to the public and publicly guaranteed external debt.

Debt Sustainability

A. External Debt Sustainability Analysis

14. Under the baseline scenario, all external debt indicators breach the policy relevant thresholds in the near and medium term (Table 1, Text Table 6 and Figure 1).6

  • The PV of external public debt in terms of GDP would reach 68 percent at end-2020 and is projected to remain above the prudent threshold until 2027. This is partially driven by ENH borrowing to finance its equity participation in the LNG megaprojects, and the issuance of a sovereign guarantee to ENH to cover its share in the borrowing package for Area 1 Golfinho project7 The ratios would drop below the prudent threshold by 2028, as the sovereign guarantee contractually lapses in 2026 (after the start of LNG production).

  • After worsening in 2020, the PV of external public debt in terms of exports would gradually decline, albeit above the 140 percent prudent threshold until 2023. It would improve rapidly thereafter as LNG exports pick up over the long term.

  • External public debt service in terms of revenue would drop below the prudent threshold temporarily in 2020 but would breach again the threshold the following year and up to 2030. The uptick around 2025 is a result of ENH starting to service its debt as LNG production is expected to start.

  • External public debt service in terms of exports would drop below the prudent threshold in 2024 and would remain below it during the rest of the projection period.

Table 1.

Mozambique: External Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – p(1 +g)]/(1 +g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Text Table 6.

Mozambique: PPG of External Debt

(Percent of GDP)

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Sources: Mozambican authorities; and IMF staff calculations and projections.

15. External public debt and public debt service ratios are most sensitive to exchange rate and export shocks (Table 3). The stress tests illustrate that a nominal export growth (in U.S. dollars) set to its historical average minus one standard deviation, or the baseline projection minus one standard deviation (whichever is the lower) in 2020 and 2021, would increase the PV of external public debt-to-GDP ratio by 26 percentage points (to 93 percent) in 2021. Similarly, the PV of external public debt-to-export ratio would double to 369 percent in 2021 (compared to 180 percent under the baseline). The export shock has a similar effect on the two debt service ratios. Vulnerability to exchange rate movements is an expected outcome for a commodity exporter like Mozambique with a relatively low export-to-exchange-rate elasticity and a relatively high share of external public debt in the total. External debt service indicators are also sensitive to the assumptions around ENH’s future debt service profile.

Table 2.

Mozambique: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments plus social security, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Mozambique: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

B. Public Sector Debt Sustainability Analysis

16. The PV of debt-to-GDP ratio is projected to surpass the 35 percent of GDP benchmark until 2028 (Table 2 and Figure 2). Total public and publicly guaranteed debt amounted to about 110 percent of GDP as of end-2019, with external debt accounting for about four-fifths of the total. The evolution of public debt is driven mainly by the same factors influencing external debt, including those related to ENH’s share in the LNG megaprojects. The debt service (including rollover of T-bills for cash flow management) is expected to absorb nearly 37 percent of expected revenues and grants in 2020 and decline in the following years.

17. The standardized sensitivity analysis shows public debt indicators are highly sensitive to primary balance, exports as well as changes in current transfers and FDI (Table 4). A shock to the primary balance would lead the PV of debt-to-GDP ratio to reach 107 percent (compared to 84 percent under the baseline scenario) by 2021. A shock to exports or current transfers-to-GDP and FDI-to-GDP ratios would increase the PV of debt-to-GDP ratio to about 100 percent in 2021.

Table 4.

Mozambique: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Risk Rating and Vulnerabilities

18. Mozambique’s debt is assessed to remain in distress, but sustainable in a forward-looking sense. This assessment is unchanged relative to the last DSA. Considering that, to a large extent, future borrowing and government guarantees reflect state participation in the sizable LNG developments, debt is deemed sustainable in a forward-looking sense. Participation in the recently announced G20 initiative would provide debt service relief in the near term, thus flattening the projected sharp deterioration in debt liquidity indicators due to the COVID-19 pandemic. The possibility of an extension of the G20 initiative into 2021 would be a further mitigating factor for the debt sustainability assessment. Moreover, as noted above, debt carrying capacity is likely to be stronger than signaled by the CI rating because international reserves do not need to cover imports related to megaprojects (which are fully funded through special investment vehicles outside the country). This assessment is also anchored in the authorities’ strong commitment to implement fiscal consolidation and a prudent borrowing strategy. Together with the coming on-stream of the LNG projects, this is expected to put public debt indicators on a firmly downward trajectory over the medium term. In line with the previous DSA, stress test results underscore the downside risks for debt sustainability originating from negative export and primary fiscal balance shocks that could hit the Mozambican economy. These results further emphasize the need to diversifying the economy and broadening the export base as well as implementing a prudent borrowing strategy.

19. Debt management and oversight needs to be strengthened further. While the authorities have already taken important steps, including to improve the transparency of the process of considering and granting sovereign guarantees, the MEF debt unit needs to be strengthened with respect to both its capacity and clout to exercise effective oversight over the entire public debt portfolio and to implement stronger safeguards. In addition, building on the new SOE Law, oversight over the entire SOE sector needs to be substantially strengthened.

Authorities’ Views

20. The authorities broadly agree with the analysis and recommendations above. They noted that their debt strategy is being implemented with the aim to bring Mozambique’s debt risk to moderate levels over the medium term. This would be achieved through debt reduction as well as medium-term fiscal consolidation. The authorities emphasized their commitment to strengthen governance, transparency, and accountability along the lines of the Government’s Diagnostic Report prepared with IMF technical assistance. In addition, the authorities expressed their intention to request forbearance from creditors under the recently-announced G20 initiative, which would deliver debt service relief in the near term, thus providing an additional cushion to respond to the COVID-19 pandemic and flattening the projected sharp deterioration in debt liquidity indicators due to the COVID-19 pandemic.

1

Mozambique’s Composite Indicator score is 2.60 based on the October 2019 WEO and the 2018 CPIA, indicating that the country’s debt-carrying capacity is weak. The analysis presented in this document is based on the new debt sustainability framework (DSF) for low-income countries (http://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic-dsf).

2

IMF Country Report 19/136, May 16, 2019.

3

This includes Mozambique’s National Hydrocarbons Company (ENH) borrowing to finance its equity participation in the LNG megaprojects, along with any sovereign guarantees issued to cover ENH’s share in the LNG megaprojects’ financing package.

4

HCB meets the criteria for exclusion set out in the 2017 Staff Guidance Note on the Debt Sustainability Framework for LICs (Appendix III) because it is run on commercial terms, has a good financial performance, enjoys managerial independence, and borrows without government guarantee.

5

Mozambique’s debt carrying capacity assessment would have been medium if only non-megaproject imports were considered in the calculation of the Composite Indicator. Megaproject imports are fully financed through special investment vehicles outside the country and included in the balance of payments statistics, with no potential bearing on international reserves. This argues for the exercise of judgment in assessing sustainability.

6

As in the last DSA, the historical scenario has been excluded from Figure 1. Such a scenario shows unrealistically fast declines in the public debt-to-GDP ratio, as the non-interest current account deficit at the historical average is much lower than projected because of LNG investments. Meanwhile, private debt accumulation is assumed to remain unchanged compared to the baseline.

7

In the baseline, the guarantee is phased-in in line with the expected flow of disbursements as the LNG megaproject led by Total (Golfinho project) is implemented, and that contractually the guarantee does not give rise to debt service payments and it ceases to exist in the first year after LNG production starts.

Republic of Mozambique: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique
Author: International Monetary Fund. African Dept.
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    Mozambique: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–2029

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    Mozambique: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

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    Mozambique: Drivers of Debt Dynamics – Baseline Scenario

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    Mozambique: Realism Tools