OREANDA-NEWS. Fitch Ratings has affirmed the Republic of Mozambique's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling has been affirmed at 'B+' and the Short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS
Growth has outpaced rating peers for more than a decade, supported by high infrastructure and foreign investment, as well as macroeconomic stability. Growth in 2015 is likely to fall to 6.8%, below the average of 7.2% recorded over the past five years, but still well above the 'B' median of 4.4%. The slowdown is due to the adverse impact of severe flooding in early January on agricultural production and infrastructure.

The medium-term growth outlook remains favourable, albeit subject to downside risks from low commodity prices and infrastructure bottlenecks. Potential development of the coal sector is being undermined by high transportation costs and low prices. The development of liquefied natural gas (LNG) facilities is expected to continue, costing a total of around USD40bn. However, low oil prices and the possibility that Anadarko, a key investor in the sector, may sell its stake to Exon Mobil, may see the final investment decision reached only in 2016; thus, the LNG facilities may not be built until 2020 or later.

Public finances have steadily deteriorated since 2008, reflecting increased infrastructure investment and a widening wage bill. Fiscal risks could arise from running high budget deficits and building up debt in expectation of natural resource revenues, which remain subject to a degree of uncertainty. The budget deficit widened sharply in 2014, due to a sharp increase in spending related to elections and the peace deal with the Mozambican National Resistance Movement (Renamo) as well as net lending to ENATUM, the state-owned tuna fishing company. The deficit widened to 5.7% (or 10.3% including transfers and net lending to ENATUM) from 2.6% of GDP in the previous year. However, this is lower than the authorities' expectation of a deficit of 13.1%, reflecting under-spending on capital projects, which is a persistent challenge for Mozambique.

The 2015 budget that is before parliament is expected to narrow to 7.3% of GDP (or 3.4% of GDP before net lending), reflecting a reduction in one-off measures relating to ENATUM and election spending, as well as a moderation in current and capital spending. However, the pace of consolidation could be slower due to the need for post-flood reconstruction. Fiscal consolidation will be important to place debt ratios on a downward trajectory and avoid negative rating pressure.

Public debt management is weak. Government debt has been revised up substantially from the previous estimate of 43.5% to a revised 52.3% at end-2013, reflecting the inclusion of a non-concessional loan with Portugal as well as the inclusion of liabilities relating to VAT refunds. Fitch also has concerns about risks that may arise from increased borrowing of state-owned companies (SOEs), for example ENATUM's USD850m Eurobond issued in 2013 to fund the purchase of fishing boats and military equipment, the use of guarantees and the government's participation in public private partnerships (PPP).

Government debt is expected to rise to 61.7% in 2016, well above the 'B' median of 47.8% of GDP. The majority (44.2% of GDP) of Mozambique's debt is external debt, with 50% owed to multilateral creditors. Despite Mozambique's high debt burden, interest costs remain low at 4% of GDP, against the 'B' median of 8.5%, reflecting its high concessional share.

The development of the LNG sector will continue to result in elevated current account deficits. Fitch forecasts the deficit will average 47% of GDP between 2015 and 2016. We do not expect this to pose a threat to macroeconomic stability, with rising imports funded through increased foreign direct investment and private sector debt. Fitch expects the impact on the balance of payments to be modest, with reserves still forecast to rise slowly. A total of USD15bn foreign investment has been made in Mozambique over the past three years.

Mozambique has made steady progress improving the business environment; its ranking in the World Bank's Doing Business Survey has risen to 127 in 2015 (out of 189 countries) from 142 in 2014. The rise reflects efforts to improve the ease of starting a business, dealing with construction permits and registering a property. The authorities will continue to implement the Business Environment Improvement Strategy, which is expected to end in 2017.

Low per capita income and human development indicators remain a major constraint on the rating, falling below the 'B' median. Poor data quality is also a rating weakness.

RATING SENSITIVITIES

The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, the main factors that individually, or collectively, could trigger a positive rating action include:
--Greater materialisation of the benefits of natural resource endowments in coal and natural gas on government revenue and exports.
--A continued track record of economic management supportive of strong and stable economic growth and an improvement in per capita income.
--Further regulatory reforms and more effective implementation reflected in improvements in the business environment.

The main factors that individually, or collectively, could trigger a negative rating action include:
--Sustained low commodity prices that erode external debt sustainability and jeopardises the development of the coal and LNG sectors.
--A weakening in public finances, for example due to rapid increases in current expenditure leading to a failure to reduce the budget deficit and stabilise government debt, or the discovery of additional debt or contingent liabilities.
--A return to violence that undermines the business environment and has a detrimental impact on exports and investment.

KEY ASSUMPTIONS

The rating and Outlook are sensitive to a number of assumptions:
--Infrastructure development will continue to facilitate the expansion of the coal sector and the development of natural gas.
--There is no return to civil war.