Country Risk Rating

D
A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high. - Source: Coface

Business Climate Rating

D
The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

Strengths

 

  • Favorable geographical location: long coastline, proximity to the South African market
  • Significant mineral (coal), agricultural, and hydroelectric potential
  • Huge offshore gas fields discovered in 2010

 

Weaknesses

 

  • Weak diversification; dependent on commodity prices (aluminum, coal)
  • Inadequate transport and port infrastructure, which constrains the country’s commodity export capacities
  • Banking system constrained by government financing needs
  • Unstable political and security environment
  • Weak governance
  • Difficult climatic conditions

Current Trends

Development of gas reserves will drive the recovery

The country was still trying to recover from the slowdown resulting from the hidden debt crisis and the damage done by tropical cyclones Idai and Kenneth in 2019 when the crisis triggered by the COVID-19 pandemic plunged the economy into its first full year of recession in 28 years. In 2021, the economy should return to growth, thanks to the gradual recovery inactivity. Firmer external demand should support a rebound in exports, particularly of coal and aluminum (about half of the total). Implementation of projects to develop offshore liquefied natural gas (LNG) reserves will be slower in 2021 but should nevertheless support private investment, which will probably be one of the main drivers of activity. The development of new LNG reserves could however be held back by insecurity linked to the Islamist insurgency in the key northern region of Cabo Delgado, which is close to major offshore gas reserves. The heavy debt burden and the fiscal position, which has worsened due to emergency measures taken to deal with the pandemic, will exert a drag on public investment. While social distancing measures had a negative impact, consumption is expected to recover in 2021, supported by the central bank’s more accommodative monetary policy. Nevertheless, with around 70% of employment depending on agriculture, drought in parts of the country and population displacements caused by insecurity in Cabo Delgado will remain major constraints on domestic demand.

Public and external accounts under heavy pressure

The additional expenditures related to the COVID-19 pandemic compounded the budgetary challenges of a country already struggling with great difficulties. Fiscal consolidation efforts, which had allowed the country to return to a primary surplus (budget balance excluding interest payments) before the pandemic, are expected to resume in 2021, enabling the deficit to be reduced. Nevertheless, these efforts will be hampered by extended COVID-19 related spending, the state wage bill (over 50% of state revenues), defense expenditure to contain insecurity, and debt servicing. On this last point, despite the restructuring agreement with holders of the defaulted Eurobond, the stock of arrears remains high. However, the country will benefit from the G20 debt service suspension initiative until June 2021. Financing for the deficit, which is largely due to the crisis, will rely on emergency funds from international donors and domestic debt, further increasing the already heavy debt burden.

In 2021, the large current account deficit will continue to be fuelled by the impact of major LNG projects on the trade deficit. Capital goods imports for these projects, about 20% of the total in 2019, will affect the balance of goods, while engineering services will be responsible for a huge services deficit. The goods and services deficits are thus expected to widen as the implementation of these projects resumes. Although it is less significant, the income deficit will also be increased by the repatriation of investment profits. The current account deficit will be slightly mitigated by the transferred surplus, which is primarily maintained by current international cooperation. FDI, especially project-related FDI, will finance much of the deficit. However, as recourse to external debt remains difficult since the Eurobond default in January 2017, the large current account deficit is set to keep up the pressure on the metical, which has already lost more than half of its value in a decade.

An increasingly fragile security and social environment

Following general elections in October 2019, the Mozambique Liberation Front (Frelimo) took 184 of the 250 seats in the assembly, and its candidate, Filipe Nyusi, won a second presidential term, reaffirming the party's domination of the political scene since the country's independence in 1975. However, the elections, which were marred by accusations of fraud, also confirmed tensions inherited from the post-independence civil war (1975-1992) with the Mozambique National Resistance (Renamo). Although the two parties signed a peace deal in August 2019, several armed wings of Renamo, which had rejected the 1992 peace agreement to take up arms again between 2013 and 2016, broke away and are allegedly behind attacks carried out in Sofala and Manica, two provinces in the center of the country. These long-running domestic tensions are compounded by the Islamist insurgency in the Cabo Delgado province, which has been raging since 2017 and which intensified in 2020. The Mozambican al-Shabab group (no links to the Somali Islamist group), which has pledged allegiance to the Islamic State, took control of the strategic port city of Macimboa da Praia in August 2020. Meanwhile, the social climate is extremely tense, with the authorities' difficulties in containing the COVID-19 pandemic adding to frustrations over corruption, mismanagement of public finances, and widespread poverty.

The unstable political environment and corruption contribute to the perception of a difficult business climate.

Source:

Coface (02/2021)
Mozambique